BANKRUPTCYDICTIONARY

Revised 11/09/09

This section is intended to provide a very briefexplanation of commonly encountered bankruptcy terms. For further information,please consult bankruptcy counsel

Abandonment

A trustee may "abandon any property of the estate that is burdensome orof inconsequential value and benefit to the estate." A party in interestmay also request the trustee to abandon. The trustee’s power to abandon property isnot without limitations. In anenvironmental context, the U. S. Supreme Court, in a 5-4 decision, has heldthat there are circumstances in which a trustee may not abandon. Midlantic Nat. Bank v. NewJersey Dept. of Environmental Protection, 474 U.S.494 (1986)

Absolute Priority Rule

Claims held by members of a senior class rejecting a proposed Chapter 11 plan ofreorganization must be satisfied before a junior class may receive any distribution. Theabsolute priority rule effectively prohibits the debtor’s owners from retainingany post-confirmation ownership interest absent the consent of creditors orsome applicable exception.

Adequate Assurance

If a debtor or trustee proposes to assume an executory contract, such asa lease, adequate assurance of ability to perform is required. 11 U.S.C. § 365.

Adequate Protection

Post-petitionpayments afforded to a creditor in order to protect the creditor’s securedposition from further deterioration. Most often adequate protection issues arise:

(i) when a secured creditor seeks relief from the automatic stay to proceedagainst the collateral in connection with post-petition DIP financing; or

(ii) when the debtor proposes to use cash collateral in which the secured creditorhas an interest. Adequate protection may take a number of forms including cashor lump sum payments or other security of some type. In most courts, “equitycushion” is also viewed as provide a creditor with adequate protection.

Administrative Claims/Expenses/Priorities

Post-petition claimsgiven enhanced priorityunder §507(a)(1) to encourage competent persons to administer the bankruptcycase and trade creditors to do business with a reorganizing debtor.Administrative claimsare defined in Code §503(b) and include the "actual, necessary costs ofpreserving the estate," certain taxes, and services and related expensesrendered by a trustee,examineror attorney as approved by the court.

Adversary Proceeding

A civil action in bankruptcy requiring the filing of a complaint andsummons by the plaintiff and an answer by the defendant. Adversary proceedingsare governed by the Bankruptcy Rules of Procedure, which in most respectsmirror the Federal Rules of Civil Procedure.

Allowed Claim

In order to be considered for distribution, a claim or interest must beproperly allowed by the court.

Artificial Impairment

An illusory impairment of the rights of one class of creditors in a plan ofreorganization. This usually occurs in Chapter 11 cases when the debtor isattempting to obtain acceptance of the plan by an impaired class as required under Code§1129(a)(10), to cramdown the plan on non-accepting classes. An example of an artificialimpairment is a plan proposing to pay unsecured trade creditors in full followinga 60-day delay when the delay in payment is solely to create an impaired classlikely to accept the plan. Unsecured trade creditors would be expected to accept any plan inwhich full payment is made regardless of any de minimis delay; as a result, no impairment exists under suchcircumstances for purpose of Code’s confirmation requirements. See Windsoron the River Assocs., Ltd. v. Balcor Real Estate Fin., Inc., 7 F.3d 127(8th Cir. 1993).

Assumption/Assume

A debtor or trustee may assume an unexpired lease or executory contractif existing defaults are cured (or adequate assurance is given) and adequate assuranceis given of future performance. With few exceptions, an unexpired lease or executory contractmay be assumed and assigned even if expressly prohibited in the agreement.Typically, the only real dispute involves what constitutes prompt or reasonablecure of the existing defaults.

Automatic Stay

An injunction against any recovery or collection efforts in any wayaffecting property of the bankruptcy estate. The stay arises immediately upon thefiling of a bankruptcy petition without any court action or notice to creditors. Thecommon retort that I had not notice does not affect its effectiveness. Theautomatic stay is subject to numerous exceptions found in Section 362. Willfulviolations of the automatic stay may be punished by sanctions, compensatory andpunitive damages or contempt citations.

Avoidance Powers

Power of the trustee or debtor-in-possessionto recover certain pre-petition and post-petition transfers of property of thedebtor, most often preferences or fraudulent conveyances.  There are specific limitations on avoidancepowers found in Section 546.

Avoidance Action

An adversary proceeding filed by trustee or debtor-in-possession for thepurpose of avoiding a pre-petition transfer of property of the estate,typically a preference or a fraudulent conveyance.

Bad Faith Filing

A bankruptcy case may be converted or dismissed for "cause." SeeCode §1112(b). Many cases have addressed what facts constitute cause fordismissal, focusing on the debtor’s lack of good faith in filing the bankruptcycase. Some cases employ an objective analysis concentrating on the debtor’srehabilitation prospects and the presence of certain indicia of bad faith. Inre Little Creek Development Company, 779 F.2d 1068 (5th Cir. 1986). Othercases look to the debtor’s subjective intent upon filing the bankruptcy case. Inre Phoenix Piccadilly, Ltd., 849 F.2d 1393 (11th Cir. 1988). The hybridapproach employs both objective and subjective tests. Carolin Corporation v.Miller, 886 F.2d 693 (4th Cir. 1989). Espousing clearly a minority view, atleast one court has held that the Code does not contain a good faith filingrequirement. In re Victoria Ltd. Partnership, 187 B.R. 54 (Bankr. D. Mass. 1995).

BankruptcyAdministrator

Bankruptcy Code

Federal bankruptcy law existing before the enactment of the Code in 1978

Bar Date

The last date for filing a proof of claim or interest. See Rules 3001-3005. The term also refers to any deadline,usually different from the deadline to file a proof of claim or interest, establishedby the bankruptcy court or Code/Rules for objecting to a party ininterest’s motion for affirmative relief or for filing an adversaryproceeding to object to the debtor’s discharge or to the dischargeabilityof a particular debt. See Rules2002, 4004 & 4007.

Best Interests Test

One of the many requirements for confirmation of a Chapter 11 plan. Code §1129(a)(7)requires each impairedclass under a Chapter 11 plan either vote to accept the plan orreceive or retain under the plan at least as much as they would have received or retainedunder a Chapter7 liquidation. A best interests test is also applied in Chapter 12and Chapter13 cases with respect to the confirmation of the plan.

Bifurcated Claim

A creditor with a claim secured by a lien on property of the estate is securedonly to the extent of the value of the creditor’s collateral. See Code §506. The claim is unsecuredto the extent that the value of the creditor’s interest exceeds the value ofthe property. Accordingly, an undersecured creditor’s claim isbifurcated into separate secured and unsecured claims. Often bifurcation disputes focus upon how to value thecreditor’s security, as well as application of the valuation method selected. See Cross-collateralization; Section 1111(b) Election.

Break-up Fee

When an asset is proposed for sale to a bidder, it is common to providethat a negotiated amount or percentage of the purchase price be paid to thebidder in the event a rival bid is approved. The term “stalking horse” is alsoassociated with this concept.

Cash Collateral

Code §363(a) defines "cash collateral" as cash, negotiableinstruments, documents of title, securities, deposit accounts, or other cashequivalents in which the estate and an entity other than the estate (e.g., a lender with a perfected security interest) have aninterest. Cash collateral includes the proceeds, products, offspring, rents, orprofits of property subject to a security interest. A debtor-in-possession may use cashcollateral only with the consent of the secured creditor or pursuant to an order ofthe bankruptcy court.

Chapter 7

A type of bankruptcy initiated voluntarily or involuntarily by eitherindividuals or business entities that provides for the orderly liquidation ofthe debtor’s estate,excluding exemptassets, under the direction of a court-appointed trustee.

Chapter 11

A type of bankruptcy initiated voluntarily or involuntarily byindividuals or business entities for purposes of financial reorganizationthrough a confirmed plan of reorganization. During estate administration, the debtorusually continues to operate its business as a debtor-in-possession. In rare cases,however, the court may appoint a trustee.

Chapter 12

A voluntary reorganization limited to family farmers with regular annualincome and limited debts.

Chapter 13

A type of voluntary bankruptcy reorganization for individuals with regularincome and outstanding debt within specified statutory limits. This used to beknown long ago as a “wager earner plan.” The debtor retains possession of assets and pays to the trustee a setamount which is disbursed to creditors.

Claim

The right to payment in a case, evidenced by the filing of a Proof ofClaim.  

Class

A mechanism for separating creditors into similarly situated categoriesunder a Chapter11 plan of reorganization or Chapter 13 wage earner plan.

Clerk

The Bankruptcy Clerk, whose office is located in Montgomery. The function of the clerk is toprocess and maintain all filings related to bankruptcy matters. The clerk’soffice does not provide legal advice, nor do they assist you with matters thatare within the function of your attorney, a creditor, or the trustee.

Co-debtor Stay

In effect, the extension of the automatic stay to a non-debtor liable with aChapter 13debtor for all or part of a consumer debt. Code §1301(a). The stay does not apply if thenon-debtor became liable for the debt in the ordinary course of his or herbusiness or if the Chapter 13 case is converted to a case under Chapter 7 or Chapter 11. The co-debtor stay is also available in Chapter 12cases. Code §1201. Although the co-debtor stay is limited to Chapter 12and Chapter13 cases,some courts will enjoin actions against certain co-debtors not in bankruptcy ina Chapter 11reorganizationwhere the injunction is essential to a successful reorganization and the requirements forissuing an injunction are otherwise met. Code §105(a).

Commencement of a Case

The filing of a petition in a voluntary or an involuntary case. Code §301.

Confirm/Confirmation

The process by which a Chapter 11 plan of reorganization or Chapter 12/Chapter13 planis formally approved by the bankruptcy court. The "holy grail" of theprocess is the court’s entry of a confirmation order, which typically approvesthe planand addresses other post-confirmation matters. The Code specifies theconfirmation requirements for the different types of bankruptcies at §1129 (Chapter 11),§1325 (Chapter13), and §1225 (Chapter 12), respectively.

Consumer Debt

Debt incurred for personal, family or household purposes.

Contested Matter

A type of litigation pursued in a case. Rule 9014 governs contestedmatters, requiring relief be requested by motion and that reasonable notice andan opportunity to be heard be afforded to the party against whom relief issought.

Conversion

The changing of a case from one chapter of the Code to a case underanother chapter. The conversion may be voluntary (in some cases at the debtor’ssole discretion and only with court approval in others) or involuntary at theinsistence of a party in interest. Involuntary conversions are usually premisedupon the debtor’s failure to satisfy Code-mandated obligations.

Core Proceeding

The bankruptcy court may hear and determine all core proceedings arisingunder or in a case under the Code. 28 U.S.C. §157(b)(1). Core proceedings aredefined by statute, but without limitation. 28 U.S.C. §157(b)(2). Thebankruptcy court decides whether a particular dispute is a core or non-coreproceeding. The bankruptcy court may decide a non-core proceeding related to abankruptcy case, but may only propose findings of fact and conclusions of lawto the district court’s de novo review and entry of a final orderor judgment, unless all parties consent otherwise.

Cramdown

A mechanism pursuant to which the bankruptcy court may approve a Chapter 11 plan ofreorganization without the acceptance of each impaired class. Before confirminga cramdownplan,the court must find that the plan does not discriminate unfairly and is fair and equitableas to each impaired,non-consenting class.Code §1129(b).

Creditors’ Committee

A committee of unsecured creditors, typically chosen from the 20 largest,appointed by the United States Trustee in Chapter 11 cases. Code §1102. The creditors’committee is an extremely powerful force in Chapter 11 cases, as it may hire itsown counsel and other professionals, investigate the debtor, participate in theformation of a plan,request appointment of a trustee or examiner, and undertake other activities in the interests of unsecuredcreditors. The creditors’ committee represents all unsecured creditors and hasa fiduciary duty to act in their collective best interests. The Bankruptcy ReformAct of 1994 permits certain expenses incurred by creditors’ committeemembers to be reimbursed from the estate. A committee of equity securityholders or additional creditors with similar powers may be ordered by thecourt.

Cross-collateralization

A financing arrangement through which the debtor obtains post-petitionfinancing from an existing creditor by granting the creditor a securityinterest covering debt incurred pre-petition as well as that to be incurred post-petition.While a common commercial practice outside bankruptcy, cross-collateralizationhas been criticized or rejected by several courts due to the Code’s cleardistinction between pre-petition and post-petition assets/liabilities. See Saybrookcase, which held that cross-collateralization of a pre-petitionloan with post-petitionassets is per se disallowedunder Code §364.

Debtor

The individual or entity filing a bankruptcy case, or, being placeinvoluntarily in bankruptcy.  

Debtor’s Counsel

The attorney engaged to represent the debtor in the filing of abankruptcy petition. The trustee does not represent the debtor, and cannot givethe debtor legal advice. That is the function of debtor’s counsel.

Debtor-in-Possession (DIP)

In a Chapter11 case, unless the court appoints a trustee, the individual, partnership,corporation or entity in bankruptcy is permitted to continue operations as thedebtor-in-possession. The debtor-in-possession, referred to as the"DIP," has all the powers of a bankruptcy trustee, including avoidance powers.However, the DIP also has a variety of duties and obligations under the Code,including certain fiduciary responsibilities to the court and creditors.

DIP Financing

The ability of the debtor-in-possession to incur unsecured or secured debt after the petition isfiled. Code §364. The debtor-in-possession may obtain secured debt or unsecured debt outside the ordinarycourse of business, but only with court approval after notice to creditors; unsecureddebt in the ordinary course of business may be obtained without court approval.There are three alternatives for post-petition DIP financing: (i) loans ofpriority equal or superior (e.g.,superpriorityclaims) to administrative expenses; (ii) loans secured by a lien on unencumbered property of theestate; (iii) loans secured by a junior lien or even senior lien on encumbered property of theestate. The debtor-in-possession may incur debt secured by a senior or equal lien on property of theestate already subject to pre-petition a lien only if the debtor-in-possessionshows it is unable to incur debt otherwise and adequate protection exists regardingthe interest of the existing lienholder. In the granting of a senior or equallien on already encumbered property of the estate, the debtor-in-possession has the burden ofproving the existing lienholders is adequately protected. See priminglien.

Discharge

The reason bankruptcy is filed. Chapter 7, Chapter 11, Chapter 12, and Chapter 13 cases, as well as for municipalities inChapter 9and other entities under Chapter 11 cases. The discharge affords the debtor a fresh start from many pre-petitionobligations and is the hallmark of the American bankruptcy process. Certaindebts may be excepted from the discharge granted an individual debtor,depending on the chapter governing the case. Also, a discharge from any debtmay be denied under specific criteria set out in each chapter.

Dischargeability

A term referring to whether certain debts may or may not be released inbankruptcy. Code §523. Some debts are automatically excepted from discharge,but others may be declared non-dischargeable only if attacked by a separate adversaryproceeding. See Grogan case;discharge.

Disclosure Statement

A detailed, prospectus-like document that must accompany any proposed plan ofreorganization in a Chapter 11 case. While the Code does not specify its exactcontents, a disclosure statement must contain information adequate for ahypothetical reasonable investor to make an informed decision regarding theacceptability of the proposed plan. The disclosure statement must beapproved by the bankruptcy court before acceptances of the plan may besolicited. Special rules apply in a small business case.

Disinterested Person

A person that: (i) is not a creditor, an equity security holder or an insider ofthe debtor; (ii) is not and was not an investment banker for any outstandingsecurity of the debtor; (iii) has not been, within three years before thebankruptcy petition was filed, an investment banker or a security of thedebtor, or an attorney for such an investment banker in connection with theoffer, sale, or issuance of a security of the debtor; (iv) is not and was not,within two years before the date of the filing of the petition, a director,officer or employee of the debtor or an investment banker; and (v) does nothave an interest materially adverse to the interest of the estate or of anyclass of creditors or equity security holders, by reason of any direct orindirect relationship to, connection with, or interest in, the debtor or aninvestment banker, or for any other reason. Code §101(14). A "person"is also defined by the Code to include an individual, partnership andcorporation, but does not include a governmental unit.

Dismissal

Generally, a bankruptcy case is only closed after the estate hasbeen fully administered. Dismissal of the bankruptcy case terminates the casepursuant to court order before administration of the estate has been completed.Unless the bankruptcy court orders otherwise, dismissal of a bankruptcy casere-vests the propertyof the estate in the debtor and reinstates any transfers and liens avoided underthe Code.

Disposable Income

A debtor’s post-petition income in a Chapter 13 case not reasonablynecessary for the maintenance and support of the debtor or a dependent of thedebtor and, if the debtor is engaged in business, for the payment ofexpenditures necessary for the continuation of the business. Code §1325(b)(2).All disposable income must be devoted to funding the Chapter 13 plan for a period of three to fiveyears after confirmation.

Dividend

A monetary payment or distribution of other value from the bankruptcy estate tothe holder of an allowed claim or interest.  

Dragnet Clause

A clause in a security agreement securing future as well as currentloans. A "dragnet" lien enlarges the size of the creditor’s lien byany credit advanced after the original loan is made. These clauses areauthorized by Uniform Commercial Code §9-204(3). See floating lien.

Drop Dead

Provision in an order that grants a secured creditor immediate relief from stay uponanother, subsequent default (usually a payment default) by the debtor. Relief from stay isgranted without a further hearing before the bankruptcy court. Frequently, thecreditor is not even required to give the debtor notice of the subsequentdefault. Also referred to as a "time bomb" provision.

Effective Date of Plan

Date set forth in a plan of reorganization that indicates when the obligations,duties and rights under the plan vest. Generally, the effective date occurs after confirmation ofthe plan bythe bankruptcy court and frequently, there may be one or more conditionprecedents before the effective date can occur. For example, the effective dateof the plan maybe conditioned on the debtor securing adequate post- confirmation financing.

Equitable Subordination

Principle permitting the court to rank a superior or co-equal claim orinterest below that of another claim or class of claims for the purpose of distribution.Code §510(c). Equitable subordination is generally applied where the holder ofthe claimor interest, usually an insider, is guilty of inequitable conduct (e.g., self-dealing) or the claimitself is susceptible to subordination (e.g.,damages relating to an ownership interest that itself is junior to the claims ofcreditors).

Equity Cushion

The amount by which the value of an oversecured creditor’s collateralexceeds the creditor’s claim. Often, the trustee or other parties-in-interest will contend theequity cushion affords the oversecured creditor adequate protection for the debtor’s use ofthe creditor’s collateral or cash collateral. Very few courts require separate adequateprotection of an equity cushion.

Estate

All legal or equitable interests of the debtor in property at the timeof the commencementof the case.

Estate Administration

The process during which claims by and against the debtor areresolved in bankruptcy. Estate administration commences when the order for reliefis entered and ends when the case is closed.

Executory Contract

Code §365 governs the assumption, rejection or assignment of executory contracts and unexpired leases. Typically a contractunder which material performance, other than the payment of money, remainsowing by both parties. A common example is a lease or purchase agreement.

Exempt/Exemptions

Property you areentitled to keep in accordance with exemptions provided by State law. There areadditional exemptions that may apply under Federal law to certain benefits,such as Social Security and Veterans’ benefits.

Family Farmers

An individual, partnership, or corporation qualified to be a debtor underChapter 12.The phrase is a term of art under the Code and is specifically defined at Code§101(18).

Final Application

A term referring to the Trustee’s Final Application, which is arecapitulation of all receipts and disbursements in connection with theadministration of the estate. This report also itemizes all expenses, and setsforth the amount and recipient of any dividend. The court approves anapplication for final settlement after thirty days notice toparties-in-interest.

Final Order

Order formally closing the bankruptcy case after the estate has beenfully administered in accordance with the applicable chapter of the Code.  A final order is “non-appealable” if the timeduring which appeal could be taken has expired without a timely notice ofappeal.

Fraudulent Transfer or Conveyance

Recovering action available to a trustee or estate for transfer of an interest or anobligation incurred within two years prior to the filing of the petition by(i) a debtor with the intent to hinder, delay or defraud a creditor; or (ii) aninsolventdebtor which received less than reasonably equivalent value. Code §548.Provided a "triggering creditor" exists, state fraudulent conveyancelaws also apply to transfers by the debtor through Code §544(b).

Hypothetical Lien Creditor/Hypothetical Bona FidePurchaser for Value

As of the commencement of the case, the bankruptcy trustee or debtor-in possession has the powers ofa hypothetical creditor with a perfected judicial lien on property of thedebtor as well as and the powers of a hypothetical bona fide purchaserof the debtor’s property for value. Code §544. In essence, the Code gives the trustee thepower to step into the shoes of a hypothetical or fictional creditor to enforcesuch creditor’s rights under state or other applicable law, including avoidanceof unperfected liens. Trustees often use this power to turn secured lenders with improperlyperfected security interests into general unsecured creditors.

Impaired Class/Impairment

A classof claims thatwill either not be paid in full as of the effective date of a confirmed Chapter 11 plan orwill not be paid under the plan pursuant to the parties pre-petition contract. A plan maynot be confirmedover the objection of an impaired class except in the case of a cramdown,requiring at least one impaired class has accepted the plan.

Indubitable Equivalent

A term most notably used in Code §361(3) as one permissible form of adequateprotection. A flexible but narrowly applied concept intended to permitbankruptcy courts to fashion protection appropriate to circumstances whereother methods of adequate protection are inadequate. The term is derived fromJudge Learned Hand’s reference to the "most indubitable equivalence"in In re Murel Holding Corp.,75 F.2d 941 (2d Cir. 1935). The term is also relevant to confirmationof the Chapter11 cramdown plans as one of the alternative forms of value or dissentingclassof securedcreditors must receive. Code §1129(b)(2)(A)(iii).

Insider

Defined at Code §101(31), an insider is generally a relative of anindividual debtor or an entity that controls or is controlled by the debtor.The closeness of the relationship warrants greater scrutiny of the debtor’sconduct toward the insider than required if the parties had no connection,thereby assuring they are dealing with one another at arms length.Determination that an entity is an insider of the debtor has importantconsequences under the Code, including: (i) an increase in the applicableperiod for avoiding preferences; (ii) denial of discharge pursuant to Code §727(a)(7)of a Chapter7 debtor who committed certain prohibited acts in the bankruptcy case ofan insider; (iii) special scrutiny of claims for services to the debtor and alimitation on the claims to "the reasonable value of such services"(Code §502(b)(4)); (iv) inability to vote for a trustee in a Chapter 7; (v) increased susceptibilityto equitablesubordination under Code §510(c); (vi) a requirement that any proposed plandisclose the identity and compensation of any insider that will be employed orretained by the reorganized debtor; and (vii) exclusion from the counting ofclaimants in determining the minimum number of creditors needed to place anentity in involuntarypetition when fewer than 12 creditors exist.

Involuntary Petition

Pursuant to Code §303, an involuntary petition under Chapter 7or Chapter11 may be filed against any individual, partnership or corporation (withlimited exceptions) by three or more creditors, each of whom hold claimsagainst the debtor which are not contingent as to liability or subject to abona fide dispute, and such claims aggregate at least $10,000 more than the value of anylien on the debtor’s property that secures the claims. In other words, the threepetitioning creditors must have a deficiency that collectively equals at least$10,000. If the debtor has fewer than 12 creditors, then any one claimholdermay file an involuntarypetition if the petitioning claimholder has at least a $10,000 aggregateclaim.When fewer than all general partners consent, an involuntary petition mustgenerally be filed to place a partnership in bankruptcy.

Joint Petition

Single petition filed by a husband and wife, which commences a jointbankruptcy case. Code §302. Jointly filed cases are administered jointly andthe assets and liabilities of the individual debtors are generally consolidatedto the extent the court determines appropriate.

Judicial Lien

A charge against property obtained by judgment, levy, sequestration orother legal or equitable process or proceeding. The most common example is ajudgment lien under state law.

Look-back Period

The period before the order for relief during which the trustee may recover transfers of property of thedebtor. For example, the look back period for preferences is 90 days (or one year ifthe preferencewas made to or for the benefit of an insider).

Net Result Rule

Reference to a preference defense. As a result of the creditor’s advance of new valueto the debtor after the alleged preference was made, the debtor’s alleged preferenceis "netted out" against the new value given by the creditor.

New Value

The concept of "new value" plays an important role indetermining whether certain transfers will be avoidable as preferences. In preference analyses, "newvalue" generally means money or money’s worth in goods, services, or newcredit, or release by a transferee of property previously transferred. Newvalue does not include an obligation substituted for an existing obligation.

New Value Exception

An exception to the recovery of preferences and an exception to the absolute priorityrule by which an owner of a debtor may retain an interest in the reorganized debtorover the objections of a non-consenting impaired class. The exception requires newvalue in the form of "cash or cash equivalent" and does not includepromised future services. See Ahlers case; Case v. LosAngeles Lumber Company case; Woodscape case.

No Asset Case

Chapter 7 liquidation in which there will be no distribution to creditorsor partiesin interest. Rule 2002(e) provides if it appears from the schedulesthat there are no assets from which a dividend can be paid, the notice of first meeting ofcreditors may include a statement to that effect.

No DistributionReport (NDR)

An electronic report filed by the trustee advising the court that thereis insufficient non-exempt property to justify and administration of theestate.

Notice and a Hearing

Such notice as is appropriate in the particular circumstances, and suchopportunity for hearing as is appropriate in the particular circumstances; butauthorizes an act withoutactual hearing if such notice is given properly and if (i) such a hearing isnot requested timely by a party in interest; or (ii) there is insufficient time for a hearingto be commenced before such act must be done and the court authorizes such act.Code §102(1).

Order for Relief

The commencementof a voluntarybankruptcy constitutes an order for relief. The entry of the order forrelief marks the time from which the debtor receives the protections of theCode and the time from which many deadlines are computed under the Code. In an involuntary bankruptcy,an order for relief is entered after notice and a hearing or, if applicable, whenthe debtor consents.

Ordinary Course of Business Exception

An exception to the recovery of preferences. To fall within this exception,payments must be made within the ordinary course of the business of both thetransferor and the transferee and according to the ordinary business terms ofeach.

Oversecured Claim or Creditor

A creditor with a claim secured by a lien on property of the estate is secured onlyto the extent of the value of the creditor’s interest in the estate’sinterest in the property. Code §506. If the value of the property exceeds thevalue of the claim,then the creditor is "oversecured."

Parties in Interest

Pursuant to Rule 2002, parties who are required to receive notice ofmaterial actions in a bankruptcy case, including the first meeting of creditors, the proposeduse sale or lease of property of the estate outside of the ordinary course ofbusiness, the approval of a compromise or settlement, the date fixed for the filing of claims, thehearing on the dismissal or conversion of the case, the time for modification of a plan,hearings for compensation or reimbursement of expenses. Parties in interestinclude creditors, the trustee, indenture trustees, and parties requesting notice or parties thecourt requires to receive notice.

Petition

The document that is filed to commence the bankruptcy case, which resultsin the entry of an order for relief.

Plan/Plan of Reorganization

A document filed in a Chapter 11, Chapter 12, or Chapter 13 case that identifies theintention of the debtor or a party in interest with respect to the payment of creditors andthe treatment of interest holders.

Post-petition

Literally, after the filing of the petition and the entry of the order for relief.

Post-petition Financing

See DIPfinancing.

Post-petition Transfers

Literally transfers of property of the estate after the commencementof the case. The commencement of the voluntary petition constitutes the entry ofan order forrelief. In an involuntary petition, the court enters the order for relief.Post-petition transfers may be avoided by the trustee. Code §549.

Pre-petition

Literally, before the filing of the petition and the entry of the order for relief.

Preference

A trusteeor debtor-in-possession may avoid certain transfers from thedebtor made shortly before the filing of the petition if the criteria set out inCode §547(b) are met. A number of defenses are afforded the transfereeincluding credit for subsequent new value and the complete defenses of acontemporaneous exchange of value between the debtor and the transferee andpayments made in the ordinary course of business. See avoiding powers; insider;new value.

Priority Claims

Claims andexpenses that are given priority in the distribution of property of the estate or proceeds in abankruptcy case.  This type of claim mostcommonly includes certain tax obligations and certain domestic supportobligations.  

Professionals

Persons with special skill and knowledge including but not limited to:attorneys, accountants, appraisers, auctioneers or other persons who occupy acentral role in the administration of the estate or operate under a license orgovernment regulation. Code §327(a).

Proof of Claim/Proof of Interest

Written evidence which may be filed by a creditor holding a claimagainst the debtor or an equity security holder with an interest in the debtor.The failure to file a proof of claim by the relevant bar date generally eliminates theclaimant’s right to receive any distribution in the case.

Property of the Estate

A broadly defined term which includes all legal and equitable interestsof the debtor at the commencement of the bankruptcy case as well as certainafter-acquired property. Determining the extent of the property of the estate has importantconsequences with respect to the operation of the automatic stay, cash collateral determinations, andadministration of the bankruptcy case.

Reaffirmation/Reaffirm

A debtor may choose to reaffirm a debt prior to the granting of thedebtor’s discharge.Code §524(c). Reaffirmation has the effect of making the debtor personallyliable for the debt after discharge. A debtor typically wishes to reaffirm a debt when thedebtor is in default on payments due under a loan secured by property that the debtorwishes to retain. See redemption.

Reasonable Reliance

Requirement for a creditor to succeed in contending that a debt obtainedby the use of a materially false statement respecting the debtor’s or an insider’sfinancial condition. Code §523(a)(2)(B)(iii).

Reasonably Equivalent Value

The term reasonably equivalent value is used with respect to the avoidabilityof constructively fraudulent transfers. Code §548(a)(2). Reasonably equivalentvalue is not defined in the Code but "value" is defined to mean"property, or satisfaction or securing of a present or antecedent debtof the debtor, but does not include an unperformed promise to furnish supportto the debtor or to a relative of the debtor." Code §548(d)(2)(A). If adebtor transfers property and receives less than reasonably equivalent value inexchange, such property may be recovered as a fraudulent transfer if the otherelements of Code §548(a)(2) are established.

Reclamation

The avoidingpowers of a trustee are subject to any rights of a seller of goods toreclaim goods sold to the debtor in the ordinary course of the seller’sbusiness if the debtor received the goods while insolvent. Code §546. There are limitations to theseller’s reclamation rights. The seller may not reclaim goods unless the sellerdemands reclamation within 10 days after the debtor receives the goods. If the10-day period expires after the commencement of the case, the seller has 20days after the receipt of goods by the debtor to demand reclamation. The courtcan deny reclamation if the court grants the reclamation creditor priority asa claimfor costs of preserving the estate or secures the reclamation claim by a lien.

Redeem/Redemption

An individual debtor may redeem tangible personal property intendedprimarily for personal, family, or household use, from a lien securing a dischargeableconsumerdebt if the property is subject to an exemption or has been abandonedby the trustee.To redeem the property, the debtor must pay the lien holder the amount of the allowed securedclaim in a lump sum.

Reference

The referral of jurisdiction from the district court to the bankruptcy court.28 U.S.C. §157.

Relief from Stay

A motion filed by a party in interest requesting the court to lift the automatic stayso that the requesting party may proceed against the debtor or against specificproperty. Examples of cases in which a party may move for relief include aholder of a security interest that wants to foreclose on its collateral and a

litigant in a non-bankruptcy court that wants to establish the debtor’sliability for the limited purposes of establishing the liability of a thirdparty (e.g., an insurancecarrier). In the alternative, a court may deny relief from the automatic staybut provide the requesting party with adequate protection of its interest. The Bankruptcy ReformAct of 1994 requires the bankruptcy court to conclude the final hearingon a motion to lift the automatic stay within 30 days after the conclusion of thepreliminary hearing, a requirement intended to encourage prompt resolution ofmotions for relief from the automatic stay.

Reopening Cases

A bankruptcy case that has been fully administered and closed may bereopened to accord relief to the debtor or for other cause.

Rule 2004 Examination

Rule 2004 allows any party in interest to seek an order from the court to examine anyentity. The scope of the 2004 Examination is very broad. The 2004 Examinationmay relate to the acts, conduct or property or to the liabilities and financialcondition of the debtor, to any matter that may affect the administration of property of theestate or the debtor’s right to a discharge.

Schedules and Statement of Financial Affairs

Documents required to be filed by the debtor shortly after the filing ofthe bankruptcy case that set out the current financial status and recentfinancial history (usually reaching back one year) of the debtor. The schedulesand statement of financial affairs often provide information relevant to adenial of the debtor’s discharge or an exception to the discharge of particular debts.

Section 341 Meeting (First Meeting of Creditors)

A meeting convened within a short time after the order for relief in which creditors andthe trusteehave an opportunity to question the debtor under oath. Code §341(a). The Bankruptcy ReformAct of 1994 requires the United States Trustee to examine the debtorto ensure the debtor is aware of the effect of >discharge, alternative relief underother chapters of the Code, and the debtor’s knowledge of the effect of reaffirmation.The date first set for the Section 341 Meeting plays an important role indetermining the bar date for filing a proof of claim or interest and objection to dischargeor the dischargeabilityof a particular debt.

Section 363 Sale

The trusteeor debtor-in-possessionmay sell propertyof the estate in the ordinary course of business without court approval. A sale mayalso be made under Code §363 outside of the ordinary course of business upon courtapproval. Property may be sold free and clear of any interest in the propertyheld by a third party if: (i) applicable non-bankruptcy law permits sale;(ii) the third party consents; (iii) the third party’s interest is a lien andthe purchase price is greater than the aggregate value of all liens on suchproperty; or (iv) the third party’s interest is subject to a bona fide dispute.Property in which the estate has only a partial interest may be sold subject tocertain limitations.

Secured

The extent to which a creditor’s lien attaches to property. Thecreditor’s secured claim is limited to the value of the property. See oversecured, undersecured.

Security Interest

Means a lien created by an agreement which means a charge against orinterest in property to secure payment of a debt or performance of anobligation. Code §§101(37) and (51).

Setoff

Subject to restrictions in Code §553, a mutual debt owed by a creditorto the debtor may be offset against a claim of the creditor so that only thebalance after the deduction will remain as a claim against the estate or property of theestate.

Stalking Horse

Stolen from Shakespeare, this refers to the initial bidder for assetsoffered for sale through the Code. Since bankruptcy sales invariably become aform of auction, with the initial bid subject to competing and higher bids, theinitial "stalking horse" bid establishes a minimum offer for purchaseof the debtor’s assets. Because the bid often becomes a target for other bids,stalking horse bidders typically request both break-up fee and topping fee protections.The former, typically tied to reimbursement of due diligence expenses, is a feepaid a stalking horse bidder who is ultimately outbid for the assets, while thelatter requires subsequent bidders to beat the stalking horse bid by aspecified dollar increment.

Statement of Financial Affairs

See schedules.

Statement of Intent/Statement of Intention

A Chapter7 debtor must file a statement of the debtor’s intention to retain or surrender property of thestate which secures a consumer debt. If applicable, the debtor must also state thatthe property is claimed as exempt. Code §521(2)(A); Rule 1007(b)(2).

Statutory Lien

A lien arising solely by force of a statute, such as a landlord’s lien. Statutoryliens are avoidableby the trusteeunder certain circumstances.

Strip Down

The process by which a creditor’s secured claim is reduced to the valueof the creditor’s collateral in accordance.

Strong-arm Powers

The avoidancepowers of a trustee as a hypothetical lien creditor and a hypothetical bona fide purchaser for value.Code §544(a).

Student Loans

A debtor is not discharged from certain loans for educational benefit,scholarship or stipend. Code §§ 523(a)(i) and 1328(a)(2).

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Substantial Abuse

The bankruptcy court may dismiss a Chapter 7 case filed by an individualdebtor whose debts are primarily consumer debts on the grounds that allowingthe bankruptcy to proceed would substantially abuse the provisions of Chapter 7.Code §707(b). The court can dismiss for substantial abuse on its own motion oron motion filed by the United States Trustee, not at the request of any party in interest.

Superdischarge

The dischargea debtor receives in a Chapter 13 case is broader than the discharge received in a Chapter 7or Chapter11 case. The discharge in Chapter 13 is sometimes called a superdischarge. Code §1328.

Superpriority Claims

The court after notice and a hearing may authorize the debtor to borrow moneyand give the lender a claim for the borrowed funds that has priority over some or all administrativeexpenses of the estate.

Surplus Notice

If the trustee determines that the payment of allowed claims filedwithin the bar date originally established by the court will leave a “surplus,”an additional Notice of Surplus is sent out to creditors allowing an additionalthirty (30) days to file proofs of claim

Surplus

Funds that remain after payment of all administrative expenses andallowed claims with interest. This surplus is returned to the debtor.

Surrender

Turnover of property by a debtor. For example, upon the appointment of abankruptcy trustee,the debtor must surrender to the trustee all property of the estate and any recordedinformation related to such property. Code §521(4). Similarly, a debtor maysurrender property to a creditor with a lien on such property.

Trustee

An individual, usually an attorney in private practice, who is appointedby the court or elected by creditors to take possession of property of theestate and liquidate or manage the debtor’s property. An interim trusteeis appointed in every Chapter 7 regardless of the amount involved, usually from a panelof approved trustees. In most cases, the interim trustee serves as the trusteealthough the creditors may elect another qualified person to serve as trusteeupon the request by creditors holding at least 20 percent of the fixed,liquidated, unsecuredclaims in the case. In Chapter 13, a standing trustee hasresponsibility for monitoring numerous cases. A trustee may be appointed in a Chapter 11,usually upon a finding of incompetence or fraud with respect to those operatingthe debtor-in-possession.The BankruptcyReform Act of 1994 provides that upon a request by a party in interestwithin 30 days of the appointment, the trustee is to be elected in the samemanner as in Chapter7. A trustee is not an employee of the United States Trustee or Bankruptcy Administrator althoughthe trustee is subject to supervision and auditing by the United StatesTrustee or Bankruptcy Administrator.

Turnover

Anyone who holds property of the estate or property the trustee may use, sell or lease on thedate of the commencementof the case must deliver or turn over the property to the trustee.Code §542.

Undersecured

A creditor with a claim secured by a lien on property of the estate is securedonly to the extent of the value of the creditor’s interest in the estate’s interestin the property. The creditor is undersecured to the extent that the value ofthe property is less than the claim. An undersecured creditor is generallyunable to recover interest and reasonable fees and costs on its undersecured claim.

Unexpired Lease

A lease that has not been effectively terminated by a party thereto orby its own terms pre-petition.

Unimpaired Class

A category of claims under a plan of reorganization that is paid in fullwith no alteration of legal or equitable rights.

Unsecured

A claimin a case that is not secured by a lien on property of the estate. .

Voidable Transfers

Certain transfers under the Code are vulnerable only if a contested matteror adversaryproceeding is filed to recover them. Examples are preferencesand fraudulenttransfers.

Withdrawal of Reference

The districtcourt, which has original and exclusive jurisdiction over all bankruptcycases, usually refers the right to hear bankruptcy cases and relatedproceedings to the bankruptcy court. The district court retains the right towithdraw, partially or entirely, the right of the bankruptcy court to hear acase or proceeding.28 U.S.C. §157(d).