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Bankruptcy Lingo: 12 Terms You Need to Know

By | Bankruptcy

Going through bankruptcy is tough. It takes the advice of a good lawyer or a finance expert to make sure that you do everything right and well. On top of it all, the intricate nature of the process and the emotional impact of the proceedings can make the entire bankruptcy feel more complicated than it is. Do yourself a favor and make sure that you learn the bankruptcy lingo and terms before you begin the filing procedures.

Bankruptcy Lingo

Learning Bankruptcy Lingo:

1. Chapter 7 Bankruptcy

Chapter 7 is what most people think of when they think of bankruptcy. It involves liquidating your assets and discharging unsecured debt. In some cases, you will be forced to sell assets to satisfy your creditors if you do not pass a means test, but you will usually be able to keep most, if not all, of what you own. It takes around four months to complete the process.

2. Chapter 13 Bankruptcy

You also have the option to reorganize your debts with a Chapter 13 bankruptcy as long as you have a regular income. This type of bankruptcy forces your creditors to allow you to repay what you owe on a payment plan. Sometimes amounts are reduced, sometimes not. Sometimes you get big savings on interest, sometimes it’s just about giving you extra time to pay everything off. It’s called reorganization. The process may take a few years, but you’ll be able to keep everything.

3. Chapter 11 Bankruptcy

If you have a business and your debts stem from running that enterprise, you could qualify for a Chapter 11 bankruptcy. This is like a Chapter 13 bankruptcy for your business. Through the help of the bankruptcy courts, you will reorganize your debt, keep your business open if you like and pay back your company debts over time.

4. Automatic Stay

In either case, when you file a bankruptcy petition, all collection activity is required to stop. Foreclosures, collection phone calls, penalty rates — all this stops as soon as you file for bankruptcy and let your creditors know about your situation.

5. Creditor

Anyone to whom you owe money or claims to be owed money by you is referred to as a creditor. This could be a person or a company. Bankruptcy filings are public, so sometimes a creditor will contact the bankruptcy court if they have been left off of your petition. Try not to let this happen. It is important that you list all your creditors in your bankruptcy petition or else it could derail the proceedings.

6. Claim

The formal acknowledgment that you owe a creditor is called a claim. These claims are an important part of your bankruptcy filing.

7. Lien

When a creditor has a legal right to take your property or sell it to satisfy your debt, this is called a lien.

8. Discharge

After you complete your bankruptcy proceedings and you are successful, eligible debts will be discharged. This means that your creditors cannot pursue further action against you. Your debt with them is over and satisfied. It is important to note that while many debts can be discharged, some cannot. If you owe alimony, are behind on your child support or have back taxes, you cannot discharge that debt, and there are many other similar types of debt. Your situation also matters. Sometimes, the court decides whether it is appropriate for you to discharge a debt.

9. Non-dischargeable Debt

Debts that cannot be discharged are referred to as non-dischargeable.

10. Dismissal

If you are unsuccessful in your bankruptcy filing, it may be dismissed. This means that the bankruptcy court has decided to throw out your petition. Your creditors will be free to pursue collection or litigation (aka sue you) in order to get a court to force you to repay your debts.

11. Exemptions

When you file for any type of bankruptcy, you will need to list out all your assets and debts. The court then determines if an asset should be liquidated to help pay for a specific debt. However, there are some assets that exempt. These are called exemptions or exempt property. For instance, there is a homestead exemption that could allow you to keep your home. Also, bankruptcy petitioners are often permitted to keep their “tools of trade” — such as your computer if you are a graphic designer or your tools if you are a mechanic.

12. Means Test

The Means Test is bankruptcy lingo used in Chapter 7 bankruptcies to determine whether the person filing for bankruptcy is abusing the system. “Abuse is presumed if the debtor’s aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $12,850, or (ii) 25% of the debtor’s non-priority unsecured debt, as long as that amount is at least $7,700,” explains U.S. Courts. “The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.”

Understanding the Bankruptcy Lingo saves you time!

Bankruptcy can be a stressful time. Don’t make it harder than it needs to be by not understanding the bankruptcy lingo being used. Spending time differentiating between key concepts will make understanding your bankruptcy options easier and take some of the strain out of the process.


Chapter 13 Info, “Dismissal vs. Discharge.” [Accessed: http://www.chapter13info.com/dismissalvsdischarge.html]

Smith, Carrie, “Seven Things to Know When Filing for Bankruptcy,” The Simple Dollar, December 1, 2016. [Accessed: http://www.thesimpledollar.com/what-to-expect-when-filing-for-bankruptcy/]

US Courts, “Bankruptcy Basics Glossary.” [Accessed: http://www.uscourts.gov/educational-resources/educational-activities/bankruptcy-basics-glossary]

Keep a Tax Debt From Ruining Your Credit

By | Credit Reports, Credit Scores, Personal Finance, Your Credit

Keep Tax Debt from Ruining Credit

The IRS has more power than any other creditor. Unlike private creditors, the IRS can directly garnish your wages and levy your bank accounts. Tax liens are also one of the biggest negative items for credit scoring purposes. If you owe taxes that you can’t pay, here are your options and how they affect your credit.

Not Filing a Tax Return

Not filing a tax return to try to keep the IRS from finding out you owe taxes is one of the worst things you can do. It doesn’t even work because the IRS will receive copies of your W2s and 1099s from your employers and banks.

When the IRS realizes that you owed taxes and failed to file returns, the penalties are typically ten times greater than if you filed but paid late. The IRS will also be less willing to work with you after you’ve attempted to evade taxes. For large debts or multiple un-filed returns, you may also face criminal prosecution.

As far as your credit score is concerned, the IRS will begin the collections process and issue a tax lien as quickly as possible.

Not Paying When Filing

If you don’t pay your taxes in full by the time your return is due, you will be charged late fees and interest starting from the due date. However, if you still filed a return on time, the IRS takes a slightly friendlier approach to collections.

You will receive a bill and at least a second notice before the IRS files a tax lien. As long as you meet the deadline to avoid the lien, your credit report will never be affected.

Typically, your options will either be to arrange full payment within 120 days of the due date or to enter into an installment agreement.

Personal Loan/Credit Card

The IRS recommends that you take out a personal loan or charge your taxes to a credit card instead of using IRS repayment options. They gain the advantage of receiving immediate payment in full.

Your advantage is less clear. You avoid IRS penalties and interest, but your loan or credit card interest charges might be higher. You’ll also avoid the IRS collections process, but IRS collections don’t impact your credit if you follow the steps to avoid the lien.

When you apply for a loan or credit card, the credit inquiry will lower your credit score, and your average age of accounts credit score factor will be reduced. The increase in your credit balance will also lower your credit score. However, once you pay off the debt, you’ll have additional positive payment history on your credit report.

Installment Agreement

An installment agreement is a payment plan directly with the IRS. It may be advantageous if you can’t get a good rate on a loan or credit card.

Installment agreements never show up on your credit report, so it won’t affect your credit score. If you sign up for automatic payments, you’ll also avoid a tax lien.

However, if you default on an installment agreement, the IRS may cancel the agreement and issue a tax lien. There are several ways to default, including the following.

•     Late payments

•     Bounced payments

•     Failure to have adequate withholding or estimated tax payments  for the current tax year

•     Any other late taxes

Offer in Compromise

An offer in compromise is an agreement to settle a tax debt for less than it’s worth. The offer can be either a lump sum payment or a payment plan.

Unlike settlements or charge offs on credit card accounts, offers in compromise are not reflected on your credit report. Because the tax is considered to be settled in full, the IRS will withdraw any liens once you’ve completed the offer.

The downside is that it’s incredibly difficult to be approved for an offer in compromise. The IRS must believe that you have almost no chance of ever paying in full. This is typically only when you are disabled or well past retirement age.

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Tax Lien

If you can’t pay your taxes in full, make payment arrangements or complete your payment plan, the IRS will issue a tax lien. Tax liens will destroy even a nearly perfect credit score. They’re also automatically disqualifying for many loans, jobs and rentals.

The good news is that the IRS almost never issues liens for tax debts under $10,000. They believe the negative effect on your credit report will make it harder for you to pay back a tax debt at that level.

If you have a tax lien, there are three ways to get it off of your credit report:

  • Paying in full: Once your tax debt is paid in full, whether in a single payment or through installments, the lien will be released within 30 days. At that time, you can request the lien be withdrawn.
  • Discharge of property: If you need to sell your home or a vehicle, you can apply to have the lien discharged on that specific piece of property. Typically, the IRS will expect a portion of the sale proceeds to approve your application.
  • Withdrawal: You may also be eligible to have a tax lien withdrawn and removed from your credit report before you pay in full. Requirements include being current on all tax returns and estimated taxes as well as having a direct debit installment agreement to satisfy your past-due taxes.

Unlike other negative credit report items that stay on for seven years, once liens are withdrawn, they are completely erased from your credit report as if they never happened.


  • https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Understanding-a-Federal-Tax-Lien
  • https://www.irs.gov/taxtopics/tc201.html
  • https://www.irs.gov/Individuals/Payment-Plans-Installment-Agreements
  • https://www.irs.gov/Individuals/Offer-in-Compromise-1
  • https://www.irs.gov/taxtopics/tc653.html
  • https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/IRS-Procedures/Collection-Procedural-Questions/Collection-Procedural-Questions-3
  • https://www.irs.gov/uac/What-to-Know-about-Late-Filing-and-Late-Paying-Penalties
  • http://www.taxpayeradvocate.irs.gov/get-help/i-can-t-pay-my-taxes
  • http://www.cbsnews.com/news/stop-the-irs-from-destroying-your-credit-4-moves/

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