Glossary
of Common Bankruptcy Terms
341 meeting - (see first meeting of creditors)
absolute priority - the order of payment
to the different classes of creditors mandated by the Bankruptcy
Code. In theory, claims with higher priority are paid in full
before other claims receive anything. Junior creditors and shareholders
are paid after senior creditors. Specifically, the usual order
is: first, administrative claims; second, statutory priority
claims such as tax claims, rent claims, consumer deposits, and
unpaid wages and benefits from before the filing; third, secured
creditors' claims; fourth, unsecured creditors' claims; and
fifth, equity claims.
adequate protection - the right of a
party with an interest in the debtor's property (such as a secured
creditor) to assurance that its interest will not be diminished
during the bankruptcy proceedings.
administrative claim (or administrative
expense claim) - debt incurred by the debtor, with court approval,
after the bankruptcy filing including necessary costs of preserving
the estate, wages, salaries, court costs, lawyers' fees, accountants'
fees, trustees' expenses, etc.
adversary proceeding - litigation within
a bankruptcy proceeding instituted by the filing of a complaint.
allowed claim (or allowed interest) -
a claim of a creditor (or an equity interest) that is approved
by the court for satisfaction under the plan of reorganization.
arrangement - may refer to a variety
of formal or informal agreements worked out concerning the conditions
under which a bankrupt company may operate; often, it refers
to an extension of time in which debt can be paid off. This
was the term used under old Chapter XI.
Asset - An economic resource or item
owned by a business that is expected to benefit its future operations.
automatic stay - the suspension of actions,
such as debt collection or foreclosure, against the company
in bankruptcy. Occurs automatically when the bankruptcy petition
is filed. This action protects the debtor from creditors seeking
to seize its assets. It protects some creditors in that it prevents
one creditor from obtaining an excessive share of the assets
of the bankrupt to the exclusion of the other creditors.
avoidance power - the power of the court
to invalidate certain obligations or transactions undertaken
by a debtor prior to filing bankruptcy. It is generally intended
to reverse transfers of property that favor one creditor over
another.
ballot date - concerning a bankruptcy
reorganization, the date and time, set by the bankruptcy court,
by which all votes for accepting or rejecting the plan of reorganization
must be received.
bankrupt - the entity that files a bankruptcy;
the debtor; the insolvent entity. This is a non-technical term
and is not used in the Bankruptcy Code.
bankruptcy - (see also failure and insolvency)
a non-technical term for a legal state of insolvency.
Bankruptcy Act of 1898 - the basis of
the federal bankruptcy statutes used until the Bankruptcy Reform
Act of 1978; provided primarily for liquidation of companies;
reorganization could be effected indirectly under the 1898 Act
through equity receiverships (these were used to keep creditors
from seizing the assets of distressed companies).
Bankruptcy Act of 1933 - a statutory
expansion of reorganization for companies; (see Section 77);
the Bankruptcy Act of 1933 and the Bankruptcy Act of 1934 were
superseded by the Chandler Act of 1938.
Bankruptcy Act of 1934 - a further statutory
expansion of reorganization for companies; (see Section 77B);
the Bankruptcy Act of 1933 and the Bankruptcy Act of 1934 were
superseded by the Chandler Act of 1938.
Bankruptcy Amendments of 1984 - a set
of amendments to the Bankruptcy Reform Act of 1978. It contains
a number of provisions including: limiting the jurisdiction
of the bankruptcy court, limiting the right of companies to
invalidate labor contracts while in bankruptcy and providing
for the prevention of "substantial abuse."
Bankruptcy Code - the name given to
the statutory body of bankruptcy laws after the Bankruptcy Reform
Act of 1978.
Bankruptcy Court - the federal tribunal
where cases under the Bankruptcy Code are litigated.
bankruptcy estate - generally, the property
of the debtor that is subject to the jurisdiction of the bankruptcy
court.
bankruptcy petition - the document filed
with the court to initiate a bankruptcy proceeding.
Bankruptcy Reform Act of 1994 - most
comprehensive piece of bankruptcy legislation since the Bankruptcy
Reform Act of 1978; signed into law on October 22, 1994 with
most provisions effective immediately; included in the 1994
Act are: provisions to expedite bankruptcy proceedings; provisions
to standardize fees; provisions to encourage individual debtors
to use Chapter 13 to reschedule their debts rather than use
Chapter 7 to liquidate; provisions to aid creditors in recovering
claims against bankrupt estates; creation of a National Bankruptcy
Commission to investigate further changes in bankruptcy law;
etc.
Bankruptcy Reform Act of 1978 - first
substantive bankruptcy code revision since the Chandler Act
of 1938; took effect on October 1, 1979; some of the major elements
of this act were 1) upgrading the jurisdiction of the U.S. bankruptcy
courts to deal with cases handled by other courts (subsequently
modified); 2) allowing the filing of a single joint petition
of bankruptcy by husband and wife; 3) reorganizing the Chapters
of bankruptcy; in particular, concerning business reorganization,
Chapters X, XI and XII of the old code are replaced by Chapter
11; 4) expanding the number of people eligible and the type
of relief available to people in a new Chapter 13, wage-earner
reorganization bankruptcy; 5) altering the appellate procedure
allowing direct appeal to the U.S. courts of appeal (subsequently
modified); and 6) generally, making federal exemption provisions
and options for debtors more extensive.
Bankruptcy Rule 2004 - a provision of
the Bankruptcy Code that allows one party in a bankruptcy proceeding
to compel discovery or other examination against another party.
Bankruptcy Tax Act of 1980 - the Bankruptcy
Reform Act of 1978 did not specify how certain tax matters concerning
bankruptcies should be handled. The Bankruptcy Tax Act of 1980
was passed to specify the tax treatment of bankruptcy tax issues.
It specifies the tax treatment of, among other things, tax loss
carry-forwards and exchanges of equity for debt.
bar date - the last date that creditors
may file a claim against the debtor.
business bankruptcy - a bankruptcy categorized
by the U.S. courts as a business bankruptcy; data from the U.S.
Administrative Office of the Courts subdivides bankruptcies
into business and non-business.
business failure - (see failure)
cash collateral - cash and cash equivalents
held by the debtor in Chapter 11 subject to liens of other parties.
Chandler Act of 1938 - legislation providing
substantial modifications to the Bankruptcy Act of 1898.
Chapter - the Bankruptcy Code is organized
into Chapters. Except for Chapter 12, the Chapters of the present
code are all odd-numbered and are enumerated with Arabic numerals.
(Before the Bankruptcy Reform Act of 1978, the Chapters were
numbered with Roman numerals.) Chapters 1, 3, and 5 cover matters
of general application. Chapters 7, 9, 11, 12 and 13 concern,
respectively: liquidation (business or non-business); municipality
bankruptcy; business reorganization; family farm debt adjustment;
and wage-earner or personal (i.e. non-business) reorganization.
Chapter 11 - reorganization proceedings,
generally for business entities; the debtor maintains control
of the business in Chapter 11 (unless the Court appoints a trustee).
Chapter 9 - bankruptcies of municipalities;
only a few of these are filed each year; over the period 1980
through 1988 there averaged about 4 Chapter 9 filings per year.
Chapter 7 - liquidation proceedings;
generally assets are sold by a trustee and the company ceases
operation. (Individuals may file Chapter 7 also.)
Chapters X, XI and XII - before the Chapter
11 of the Bankruptcy Reform Act of 1978, these three chapters
of bankruptcy existed for company bankruptcies that involved
reorganization. Chapter X involved reorganization for big companies
that held public debt or equity, Chapter XI was for readjustment
of debts of smaller, non-publicly held companies and Chapter
XII was for companies with extensive holdings of real property.
Chapter 10 - a new chapter of the bankruptcy
code proposed in 1992 and pending in 1993. Chapter 10, like
Chapter XI of the old code, is designed for small business reorganizations.
Chapter 13 - bankruptcy proceedings for
an individual with the intention of rescheduling the individual's
debt (rather than liquidating the individual's assets and debt;
an individual files under Chapter 7 to liquidate); Chapter 13
is referred to as wage-earner bankruptcy, personal bankruptcy
or consumer bankruptcy; Chapter 13 cannot be used by a partnership
or a corporation; it can be used by a sole proprietorship.
"Chapter 33" - an unofficial
term describing a company that has filed for Chapter 11 three
times.
Chapter 12 - family farmer bankruptcies;
created by Congress in 1986 (Chapter 12 became effective on
November 26, 1986 and is now a permanent Chapter of the Bankruptcy
Code); only a family owned farm business can qualify for Chapter
12 and it must have debt less than $1.5 million and have 50%
of its income from farming operations.
"Chapter 20" - an unofficial
term describing the filing of a Chapter 7 proceeding followed
by a Chapter 13. The Chapter 7 filing eliminates unsecured debts
while the Chapter 13 filing handles continuing liens.
"Chapter 22" - an unofficial
term describing a company that has filed for Chapter 11 twice.
claims - rights to repayment made by
creditors against a debtor; they may be liquidated, unliquidated,
fixed, contingent, matured, unmatured, secured, unsecured, subordinated,
legal or equitable. See specific entries and see priority of
claims.
class - each of the different categories
of claims against a debtor.
confirmation - the final approval by
the bankruptcy court of a debtor's plan of reorganization. Confirmation
takes place after the plan has been approved by creditors.
contested matter - a dispute among the
parties to a bankruptcy proceeding, instituted by the filing
of a motion of the court.
convenience claims - (see small claims)
conversion - changing chapters in bankruptcy
(e.g., converting from Chapter 11 to Chapter 7 or vice-versa).
core proceedings - those proceedings
that are inherent in and fundamental to the administration of
a bankruptcy case. Core proceedings are subject to the jurisdiction
of the bankruptcy court. Non-core proceedings may be conducted
outside the jurisdiction of the bankruptcy court.
cramdown - confirmation of a plan of
reorganization over the objections of one or more classes of
creditors.
creditors' committee - a committee of
representatives of a debtor's creditors appointed by the U.S.
Trustee. The committee acts on behalf of all creditors on negotiating
a plan of reorganization and other major actions. In large,
complex cases, there may be more than one such committee.
debtor - the entity seeking protection
from creditors under the bankruptcy laws.
debtor-in-possession - the debtor which
remains in control of operations; as opposed to having a trustee
operate the company.
default - the failure by an entity to
abide by the covenants in a debt obligation or other agreement
to which it is a party. The most common default is non-payment
of interest or principal.
discharge (of indebtedness) - the satisfaction
or elimination of the debts of the debtor by the bankruptcy
court.
disclosure statement - a comprehensive
disclosure document sent to creditors when they are asked to
vote on a plan of reorganization in Chapter 11.
dismissal - the termination of a bankruptcy
proceeding. The bankruptcy court can dismiss a case if it deems
that the debtor or three creditors should not have filed or
that a plan can never be formulated. See also conversion.
distressed - used to describe securities,
companies and related items in or near bankruptcy or insolvency.
The term does not have a strict, technical or legal definition.
For example, a distressed security might be a security where
the issuer has defaulted or a security that is selling at a
substantially discounted price where a default is expected in
the future.
docket - the schedule on which the clerk
of the court records all motions, pleadings, memoranda, orders
and all other court filings.
effective date - the date on which a
plan of reorganization is implemented; usually it occurs after
all the conditions to a plan of reorganization have been satisfied.
equitable subordination - the lowering
of priority of a claim because the holder of the claim is found
to be guilty of some kind of improper conduct.
examiner - a professional appointed by
the bankruptcy court to investigate and oversee certain aspects
of the debtor or the proceedings. (By way of comparison, the
role of the trustee is to operate the business of the debtor
whereas the role of the examiner is to investigate and report
to the court.)
exchange offer - an offer by an issuer
of debt securities to exchange new securities with less onerous
provisions for currently outstanding securities. Companies often
make exchange offers in an attempt to avoid bankruptcy.
exclusivity (period of) - a debtor in
Chapter 11 has the exclusive right to file a plan of reorganization
for the first 120 days of its bankruptcy. Thereafter, unless
the period of exclusivity is extended by the court, other parties
may file reorganization plans.
executory contract - a contract in which
some or all of the obligations of each party have not yet been
completed. The debtor-in-possession (or trustee) is allowed
to reject unilaterally certain executory contracts.
failure - (see also bankruptcy and insolvency)
an economic assessment of the viability of a business, it means
that a firm is either not earning what is expected (i.e. it
has a below normal rate of return) or is not meeting its obligations.
It is not synonymous with bankruptcy because bankruptcy is more
of a formal and legal definition. A failing company is not necessarily
a bankrupt company and vice-versa.
fee examiner - appointed by the court
to monitor fees paid to professionals in bankruptcy cases.
filing fees - (as of January 1998) for
Chapter 7 the fee is $175, for Chapter 11 it is $830 and for
Chapter 13 it is $160.
first meeting of creditors (341 meeting)
- a mandatory meeting between creditors and the debtor. It is
usually held within a month of the filing of bankruptcy but
often occurs later when the debtor has filed its schedules of
financial information.
fraudulent conveyance - the transfer
of valuable assets from a company which i) occurs when the company
is technically insolvent, ii) renders the company insolvent,
or iii) is made for less than adequate consideration. The spate
of leveraged buyouts and other highly leveraged transactions
in the 1980s has spurred a number of fraudulent conveyance allegations
in recent years.
fresh start - informal term for the
new accounting rules applicable to bankrupt companies. For companies
that either file for Chapter 11 after January 1991 or emerge
from Chapter 11 after June 1991, assets are to be valued at
market value rather than at historical cost.
gap period - the period between the filing
of an involuntary petition and the dismissal of the petition,
the entry of an order for relief or the filing of a voluntary
petition (whichever is the outcome).
going concern value - what a company
is worth if sold as a continuing business, as opposed to its
liquidation value.
impairment - when a plan of reorganization
alters the contractual rights of a class of holders of claims,
that class is deemed to be impaired. A class that is unimpaired
is deemed to automatically accept a plan of reorganization.
insolvency - (see also bankruptcy and
failure) another term used to describe a firm that is failing;
generally it means that a firm's liabilities exceed its assets
or that it is unable to satisfy its obligations as they come
due.
interests - the equity interests of stockholders
are often referred to in bankruptcy documents merely as "interests."
involuntary bankruptcy - a bankruptcy
initiated by at least three creditors holding unsecured claims
aggregating at least $5000 against the debtor. Data from the
U.S. Administrative Office of the Courts subdivides bankruptcies
into voluntary and involuntary.
joint administration - the combining
of two or more bankruptcy proceedings for administrative convenience.
Frequently, the cases of affiliated entities are jointly administered.
Joint administration does not necessarily result in substantive
consolidation (see below).
liquidating reorganization - an informal
term for a Chapter 11 proceeding when the company is essentially
liquidated through one or more asset sales.
liquidation - the dissolution of a company
(or individual); usually operations cease and assets are sold
by auction; Chapter 7 is usually employed for liquidations,
business or personal.
liquidation value - the aggregate value
of a business if its assets are sold piecemeal.
matrix - a mailing list of creditors
of the debtor. Done as part of the forms filled out for a Chapter
11 case.
National Bankruptcy Review Commission
- an independent commission established pursuant to the Bankruptcy
Reform Act of 1994 to investigate and study issues relating
to the Bankruptcy Code. The Commission completed a final report
and ceased to exist as of November 19, 1997.
NOL (net operating loss) - (see tax loss
carry-forward)
non-business bankruptcy - a bankruptcy
categorized by the U.S. courts as a non-business bankruptcy;
the debtor in a non-business bankruptcy is usually either an
individual or a family farm; data from the U.S. Administrative
Office of the Courts subdivides bankruptcies into business and
non-business.
PACER (Public Access to Court Electronic
Records) - a service provided by the court system that gives
case filing information. PACER requires an IBM-compatible computer
equipped with a modem.
period of exclusivity - (see exclusivity)
personal bankruptcy - filed by an individual;
also called a household bankruptcy, consumer bankruptcy or wage-earner
bankruptcy. (see Chapter 13 and also Chapter 12).
petition - (or bankruptcy petition or
petition for relief) - the document that commences a bankruptcy
proceeding.
plan of reorganization - the document
setting forth how a bankrupt company plans to satisfy its creditors.
The plan of reorganization is the cornerstone of a successful
Chapter 11 bankruptcy.
post-petition - occurring after the filing
of a petition.
preference - a payment by a debtor made
during a specified period (90 days or one year) prior to the
filing that favors one creditor over others. Preference payments
can usually be recovered and returned to the debtor's estate.
prepackaged bankruptcy - a situation
where a company and its creditors agree to a plan of reorganization
before the company files a bankruptcy petition. In a true prepackaged
bankruptcy, a plan of reorganization is circulated and approved
by creditors before the petition is filed. The court then confirms
the plan and the company emerges from bankruptcy quickly.
pre-petition - occurring before the filing
of a bankruptcy petition.
priority claims - administrative expenses
and salaries, wages, employee benefits, customer deposits and
taxes which occurred pre-petition.
pro rata - proportionately.
proof of claim - form filed by a creditor
setting out its claims against a bankruptcy debtor.
receiver - particularly in foreign proceedings,
or state court proceedings, a person appointed by the court
to take custody of a debtor's property.
reorganization - the resolving of a Chapter
11 bankruptcy by the emergence of the debtor as a viable business.
Generally, the company agrees with creditors on a plan for payment
of their claims (plan of reorganization) and emerges from Chapter
11 after the plan is confirmed by the court.
restructuring - a general term applied
to an out-of-court attempt to reorganize and satisfy debts.
Similar to workout (see below).
Retired Benefits Bankruptcy Protection
Act - passed June 16, 1988. Allows the debtor to continue to
pay insurance premiums for employees during the course of a
bankruptcy.
reverse leveraged buyout - when a company
that was a leveraged buyout restructures its (usually unmanageable)
debt by issuing new equity (usually in exchange for some or
all of the outstanding debt incurred during the original leveraged
buyout).
Rule 2004 - (see Bankruptcy Rule 2004)
Section 77 (of 1933 Act) - provided for
reorganization of railroads (during the 1930s a large number
of railroads encountered extreme financial difficulty); (see
also Section 77B).
Section 77B - followed Section 77; provided
for reorganization of companies other than railroads.
Section 304 - the section of the present
U.S. Bankruptcy code that handles multi-national bankruptcies;
only a few of these are filed each year; over the period 1980
through 1988 there averaged about 6 filings of Section 304 per
year.
secured creditors - one of two general
types of creditors of a company. Secured creditors have a lien
on property of the company.
set-off - the ability to discharge or
reduce a debt by applying a counter claim between the same parties.
For example, a bank which has lent money to a debtor may attempt
to satisfy some or all of the loan by seizing the debtor's deposits
at the bank.
skeleton filing - term used at bankruptcy
courts to describe a bankruptcy filing in which not all the
necessary forms have been filed. Certain courts allow a case
to commence if only certain important forms are filed so long
as the balance of required forms are forthcoming within a certain
period of time.
small claims (also sometimes called convenience
claims) - under a plan of reorganization or liquidation, claims
that are small (e.g. in the hundreds or thousands of dollars
range) and numerous are often grouped into a single class and
settled for cash for administrative convenience.
straight bankruptcy - an informal term
for a Chapter 7 bankruptcy or liquidation; used more commonly
to describe liquidation before the Bankruptcy Reform Act of
1978.
substantial abuse - a term that refers
to the abusing of the privilege to file a petition. It usually
describes fraud in cases of personal bankruptcy.
substantive consolidation - the combination
of the estate of one debtor with the estate of one or more other
debtors and the application of the combined estate to satisfy
their combined liabilities. Substantive consolidation is often
considered (although infrequently applied) in the case of parent/subsidiary
debtors and other affiliated entities.
super-priority claim - an administrative
claim that will be paid ahead of other administrative and priority
claims.
tax loss carry-forward - losses, for
tax purposes, that can be carried forward and applied to reduce
taxable income in future years. The Tax Reform Act of 1986 imposed
stringent restrictions on the use of tax loss carry-forwards.
trustee - an agent of the court who manages
the property of the debtor for the benefit of the creditors.
The court appoints a trustee in most Chapter 7 cases and in
Chapter 11 cases when it determines that the debtor's management
should not remain in control. This type of trustee should be
distinguished from the U.S. Trustee, who plays an administrative
role in all bankruptcy cases.
United States Trustee - an agent of the
U.S. Department of Justice appointed to assist in bankruptcy
cases. The U.S. Trustee administers many of the duties of the
court including appointing committees, appointing trustees and
examiners, scrutinizing bankruptcy documents, etc. The United
States Trustee Program was begun in 1979. Presently, it covers
all federal judicial districts except for North Carolina and
Alabama which are scheduled to be included in October of 2002.
unsecured creditor - one of two general
types of creditors of a company. The unsecured creditors have
no liens on the property of the company.
VCIS (Voice Case Information System)
- a touchtone telephone service provided by the court system
that gives case filing information.
voluntary bankruptcy - bankruptcy filed
by the debtor itself; data from the U.S. Administrative Office
of the Courts subdivides bankruptcies into voluntary and involuntary.
vulture funds - (also referred to as
vulture capitalists or vulture investors) - investment groups
that are prominent in the restructuring of financially distressed
and bankrupt companies usually by the buying or selling of large
pieces of the distressed company's debt and/or equity.
wage-earner bankruptcy - (see Chapter
13 and personal bankruptcy)
workout
- an arrangement, outside of bankruptcy, by a debtor and its
creditors for payment or re-scheduling of payment of the debtor's
obligations. Usually applies to an informal agreement between
a business and its creditors, although it can be a formal agreement
and it can apply to consumer debtors also.workout - an arrangement,
outside of bankruptcy, by a debtor and its creditors for payment
or re-scheduling of payment of the debtor's obligations. Usually
applies to an informal agreement between a business and its
creditors, although it can be a formal agreement and it can
apply to consumer debtors also.