Glossary
Understand bankruptcy terminology with explanations that make complex concepts easy to grasp.
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341 Meeting (Creditors' Meeting)
A mandatory session where the business debtor is questioned under oath by creditors and the trustee about finances and assets. For corporations, it’s a chance to address concerns transparently, potentially easing plan approvals and reducing disputes.
Example: During a tech startup’s Chapter 11 filing, creditors quiz executives on cash flow projections, helping build consensus for reorganization.
C
Chapter 7
A liquidation process where a trustee sells the corporation’s non-exempt assets to repay creditors, usually resulting in the business closing. It’s practical for non-viable companies to avoid prolonged debt accumulation, but owners lose control immediately.
Example: A struggling manufacturing firm files Chapter 7, allowing the trustee to auction equipment and inventory, with proceeds distributed to lenders, ending operations cleanly.
Chapter 11
Reorganization for businesses, enabling the company to stay operational as “debtor-in-possession” while crafting a plan to restructure and repay debts. It’s ideal for viable firms needing time to turn around, often preserving jobs and value.
Example: An airline in financial trouble files Chapter 11 to renegotiate leases and labor contracts, emerging stronger after court approval of its plan.
Claim
A creditor’s documented right to payment from the business or its assets, which can be secured or unsecured. Businesses should review claims early to challenge invalid ones, optimizing distributions.
Example: A supplier submits a $200,000 claim against a bankrupt retailer for unpaid goods, classified as unsecured and paid partially from liquidation proceeds.
Confirmation
Court approval of the business’s reorganization plan after creditor voting, making it binding. This milestone provides certainty, allowing the company to implement changes like debt reductions.
Example: A hotel chain’s Chapter 11 plan, including extended payment terms, gets confirmed, stabilizing finances and attracting new investors.
Contested Matter
A dispute in the bankruptcy case, resolved via motion rather than a full lawsuit, often over issues like asset sales. Businesses can use this to defend positions efficiently without derailing the case.
Example: A creditor contests a corporation’s motion to sell a division, arguing undervaluation, leading to a quick court hearing.
Contingent Claim
A potential liability that depends on future events, like guarantees on loans. Disclosing these helps businesses plan for worst-case scenarios in reorganization.
Example: A parent company faces a contingent claim if it guaranteed a subsidiary’s loan that defaults during the subsidiary’s bankruptcy.
Creditor
Any entity owed money by the business, from banks to suppliers. Categorizing creditors aids in prioritizing negotiations during restructuring.
D
Debtor
The business entity filing for bankruptcy protection to manage debts. In corporate cases, it often retains management control in Chapter 11 for operational continuity.
Example: A retail corporation becomes the debtor in Chapter 7, surrendering assets to the trustee for creditor payments.
Discharge
Court release of the business from certain debts, eliminating liability post-bankruptcy. For corporations, this applies in Chapter 11 but not Chapter 7, aiding fresh starts.
Example: After reorganizing under Chapter 11, a software firm’s unsecured debts are discharged, freeing resources for growth.
Dischargeable Debt
Obligations the bankruptcy code allows to be eliminated, typically unsecured ones. Identifying these helps businesses maximize relief in plans.
Example: Trade debts from suppliers are dischargeable for a bankrupt wholesaler, reducing overall liabilities.
E
Executory Contract
An ongoing agreement where both parties have unfulfilled duties, which the business can assume or reject to optimize costs. This flexibility is key for shedding burdensome deals.
Example: A bankrupt restaurant chain rejects an executory lease for an underperforming location, saving on rent.
I
Involuntary Bankruptcy (or Petition)
A filing forced by creditors when the business isn’t paying debts as due, requiring at least three petitioners with claims over $18,600 (adjusted periodically). It’s a tool for creditors to recover assets but risky if dismissed, potentially leading to fees.
Example: Unpaid vendors file an involuntary petition against a construction company delaying payments, prompting court oversight and asset liquidation.
L
Lien
A legal hold on business property securing a debt, giving the creditor priority in repayment. Managing liens is crucial to retain essential assets during restructuring.
Example: A bank places a lien on a factory’s machinery to secure a loan, allowing seizure if the borrowing corporation defaults in bankruptcy.
Liquidated Claim
A claim for a specific, fixed amount, making it easier to resolve in distributions. Businesses benefit from liquidating uncertain claims for predictable planning.
Example: A vendor’s $50,000 invoice becomes a liquidated claim in a corporate bankruptcy, paid pro-rata from available funds.
Liquidation
The sale of business assets to pay creditors, often under Chapter 7. It’s a straightforward exit for failing companies but may undervalue assets if rushed.
Example: A tech gadget maker undergoes liquidation, selling patents and stock to satisfy secured lenders.
M
Motion to Lift the Automatic Stay
A creditor’s request to resume actions like repossession during bankruptcy. Businesses defend by proving the stay protects value for all parties.
Example: A lender motions to lift the stay on a vehicle fleet in a trucking company’s Chapter 11, but the court denies it to allow reorganization.
N
No-Asset Case
A Chapter 7 where no non-exempt assets exist for distribution, common for asset-light businesses. It speeds closure but leaves creditors unpaid.
Example: A consulting firm with leased equipment files no-asset Chapter 7, resulting in quick case dismissal without payouts.
Nondischargeable Debt
Obligations that survive bankruptcy, like certain taxes or fraud-related claims. Businesses must budget for these in post-bankruptcy operations.
Example: Payroll taxes owed by a corporation remain nondischargeable, requiring full payment despite Chapter 11 relief.
O
Objection to Dischargeability
A challenge to discharging a specific debt, often for misconduct. Businesses prepare defenses to avoid lingering liabilities.
Example: A creditor objects to discharging a loan obtained via misrepresented financials by a corporate debtor.
P
Party in Interest
Any stakeholder, like creditors or equity holders, with rights to participate in the case. This ensures broad input in corporate decisions.
Example: Shareholders as parties in interest object to a Chapter 11 plan diluting their ownership.
Plan
The business’s proposal for repaying claims in reorganization chapters, detailing terms like cramdowns. Crafting a feasible plan is vital for emergence.
Example: A manufacturer’s Chapter 11 plan proposes paying unsecured creditors 50% over five years, approved after negotiations.
Postpetition Transfer
An asset move after filing, requiring court approval to avoid reversal. Businesses track these for compliance.
Example: A company sells equipment post-filing without approval, risking trustee clawback.
Prebankruptcy Planning
Strategic asset adjustments before filing to maximize protections, like securing exemptions where applicable. Ethical planning aids smoother cases but avoids fraud.
Example: A corporation converts cash to essential inventory pre-filing, protecting it under business necessity.
Preference
A pre-filing payment giving a creditor more than in bankruptcy, recoverable by the trustee. Businesses document ordinary payments to defend against clawbacks.
Example: A 60-day pre-filing payment to an insider supplier is clawed back for equal distribution.
Priority
The legal order for paying unsecured claims, starting with administrative expenses. Understanding this guides business budgeting in plans.
Example: Employee wages get priority over general trade debts in a corporate liquidation.
Priority Claim
Unsecured debts paid before others, like recent wages or taxes. Businesses prioritize these to comply and avoid objections.
Example: Unpaid employee salaries are priority claims, paid fully before vendor debts.
Proof of Claim
A creditor’s filed form detailing the debt amount and basis. Timely filing ensures participation; businesses as debtors review for accuracy.
Example: A bank files proof for a $1M loan, including interest, in a corporate Chapter 11.
Property of the Estate
All business interests at filing, protected from creditors. Full disclosure prevents sanctions.
Example: A corporation’s patents become estate property, available for sale or licensing in reorganization.
S
Schedules
Lists of assets, liabilities, and finances filed by the business. Accuracy is key to avoid fraud allegations.
Example: A retailer schedules $5M in inventory and $10M in debts, guiding trustee actions.
Secured Creditor
A lender with collateral rights, giving leverage in negotiations. Businesses often accommodate them to retain assets.
Example: A mortgage holder as secured creditor receives property value in a hotel bankruptcy.
Secured Debt
Obligations backed by assets, reducible to collateral value in cramdowns. This protects lenders but allows business relief.
Example: An auto loan secured by vehicles is paid based on current market value in Chapter 11.
Statement of Financial Affairs
Disclosure of the business’s pre-filing transactions and history. Transparency builds creditor trust.
Example: A corporation details recent asset sales, helping identify preferences.
Subchapter V
A fast-track Chapter 11 for small businesses with debts typically under $7.5 million, featuring quicker plans (within 90 days), no absolute priority rule, and a trustee for oversight without control. It reduces costs and complexity, making reorganization viable for smaller entities.
Example: A family-owned restaurant with $2M in debts uses Subchapter V to propose a three-year repayment plan, avoiding a full creditors’ committee.
U
Unsecured Creditor
A creditor without collateral or a lien on specific assets, relying on the debtor’s general pool of funds for repayment. In corporate bankruptcy, they have lower priority than secured creditors, often receiving partial or no recovery, but can form committees in Chapter 11 to negotiate terms like equity stakes or higher payouts.
Example: Suppliers owed for inventory in a retailer’s Chapter 7 liquidation are unsecured creditors, sharing pro-rata in any remaining cash after secured debts are satisfied, potentially getting only 20-30% of their claims.