Key Terms
Bankruptcy
A federal legal proceeding in which an individual or business is relieved of most debts and undergoes court-supervised r
Purpose
Preserve as much of the debtor's property as possible; divide it fairly between debtor and creditors; give debtors a fin
Voluntary bankruptcy
Initiated by the debtor. Involuntary bankruptcy: initiated by creditors to force the debtor into a legally declared bank
Debtor
The individual or business entity who owes money to others. Files the petition (voluntary) or has one filed against them
Claim
The right of payment from the debtor.
Creditor
An individual, business, or governmental entity to whom money is owed by the debtor. A creditor holds a claim against th
Secured creditor
Holds an interest in specific property to secure the debt (mortgages, car loans, liens). If debtor defaults, secured cre
Unsecured creditor
Holds no interest in any particular property. Gets paid from whatever remains after secured creditors are satisfied.
Result for businesses
The entity ceases to exist. Winding up of affairs is part of the process.
Exception
Child support is never stopped.
Bankruptcy estate
The debtor's legal and equitable interests in property at the time the bankruptcy petition is filed.
Includes
Real property, personal property, bank accounts, investment accounts, life insurance benefits, and inheritances.
Petition for bankruptcy
Filed with the bankruptcy court by the debtor or a creditor. Married couples may file jointly.
Automatic stay
Immediately upon filing, all creditor collection efforts are stopped. Creditors cannot begin or continue collections aga
Protects the debtor
Allows focus on reorganization and repayment planning. Protects creditors: prevents the debtor from transferring assets