Key Terms
Bankruptcy
A federal court proceeding in which an individual or business that cannot pay its debts is either relieved of those debt
Debtor
The individual or business entity that owes money; either files a petition (voluntary) or has one filed against them (in
Creditor
An individual, business, or governmental entity to whom the debtor owes money; holds a claim against the debtor
Claim
The right of payment from the debtor
Secured creditor
Holds an interest in specific property as collateral (mortgage, car loan, lien); can force sale or forfeiture of that pr
Unsecured creditor
No interest in any specific property; lower priority in repayment
Trustee
The court-appointed representative of the bankruptcy estate; administers the estate, prioritizes claims, satisfies credi
Bankruptcy estate
All of the debtor's legal and equitable interests in property at the time the petition is filed
Bankruptcy plan
The detailed action plan for liquidation or reorganization of assets and satisfaction of creditor claims
Automatic stay
Immediately upon filing a petition, all creditor collection efforts and wage garnishments are legally halted
Bankruptcy discharge
Releases the debtor from monetary obligations that existed at the time of filing; ends the bankruptcy case
Liquidation
Converting assets into cash to settle debts
What happens
Debts are adjusted; debtor keeps most existing assets but commits most or all future income to repay debts under a court
Who it applies to
Individuals only; voluntary only.
Advantage
Manageable payment structure that balances debtor and creditor interests Disadvantage: ties up future income for years t