Bankruptcy Definitions
Bankruptcy is a simple concept with a lot of complex, not-so-simple rules and definitions. Some of the most critical definitions are explained below.
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Chapter
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A debtor can file for different kinds of bankruptcy, referred to as chapters. Individuals and businesses can file Chapter 7, 11 or 13. Each chapter has its own rules and results.
Liquidation
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Liquidation is the term used to describe Chapter 7 bankruptcy. Liquidation means most of the debtor's property is sold, or "liquidated," and the money is used to pay off as many of the debtor's debts as possible.
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Reorganization
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A business can file for Chapter 11 bankruptcy to reorganize. The business will submit a reorganization plan that describes how it will reorganize to produce a profit so that debts can be paid off.
Debt Adjustment
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Debt adjustment describes a Chapter 13 bankruptcy. Generally speaking, the debtor files a debt adjustment plan that explains how and when the debtor will pay off debts. Creditors are bound by the plan as long as the court approves the plan.
Automatic Stay
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This is a legal prohibition that applies in all bankruptcy proceedings. As soon as a debtor files a bankruptcy petition, all of the debtor's creditors must immediately stop all debt collection efforts.
Discharge
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When a debt is discharged in bankruptcy it means the debtor is no longer legally required to repay that debt. For all practical purposes, the debt disappears forever and is completely unenforceable.
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