KCC recognizes that the corporate restructuring process has its own unique language and bankruptcy terms can be confusing.  Following are definitions for bankruptcy terminology and legal terms commonly used in restructuring cases.


341 meeting - (see first meeting of creditors)

absolute priority - the order of payment to the different classes of creditors mandated by the Bankruptcy Code. In theory, claims with higher priority are paid in full before other claims receive anything. Junior creditors and shareholders are paid after senior creditors. Specifically, the usual order is: first, administrative claims; second, statutory priority claims such as tax claims, rent claims, consumer deposits, and unpaid wages and benefits from before the filing; third, secured creditors' claims; fourth, unsecured creditors' claims; and fifth, equity claims.

administrative claim (or administrative expense claim) - debt incurred by the debtor, with court approval, after the bankruptcy filing including necessary costs of preserving the estate, wages, salaries, court costs, lawyers' fees, accountants' fees, trustees' expenses, etc.

adversary proceeding - litigation within a bankruptcy proceeding instituted by the filing of a complaint.

allowed claim (or allowed interest) - a claim of a creditor (or an equity interest) that is approved by the court for satisfaction under the plan of reorganization.

automatic stay - the suspension of actions, such as debt collection or foreclosure, against the company in bankruptcy. Occurs automatically when the bankruptcy petition is filed. This action protects the debtor from creditors seeking to seize its assets. It protects some creditors in that it prevents one creditor from obtaining an excessive share of the assets of the bankrupt to the exclusion of the other creditors.

avoidance power - the power of the court to invalidate certain obligations or transactions undertaken by a debtor prior to filing bankruptcy. It is generally intended to reverse transfers of property that favor one creditor over another.

ballot date - concerning a bankruptcy reorganization, the date and time, set by the bankruptcy court, by which all votes for accepting or rejecting the plan of reorganization must be received.

bankruptcy estate - generally, the property of the debtor that is subject to the jurisdiction of the bankruptcy court.

bankruptcy petition - the document filed with the court to initiate a bankruptcy proceeding.

Bankruptcy Rule 2004 - a provision of the Bankruptcy Code that allows one party in a bankruptcy proceeding to compel discovery or other examination against another party.

bar date - the last date that creditors may file a claim against the debtor.

Chapter 11 - reorganization proceedings, generally for business entities; the debtor maintains control of the business in Chapter 11 (unless the Court appoints a trustee).

Chapter 7 - liquidation proceedings; generally assets are sold by a trustee and the company ceases operation. (Individuals may file Chapter 7 also.)

claims - rights to repayment made by creditors against a debtor; they may be liquidated, unliquidated, fixed, contingent, matured, unmatured, secured, unsecured, subordinated, legal or equitable. See specific entries and see priority of claims.

class - each of the different categories of claims against a debtor.

confirmation - the final approval by the bankruptcy court of a debtor's plan of reorganization. Confirmation takes place after the plan has been approved by creditors.

convenience claims - (see small claims)

creditors' committee - a committee of representatives of a debtor's creditors appointed by the U.S. Trustee. The committee acts on behalf of all creditors on negotiating a plan of reorganization and other major actions. In large, complex cases, there may be more than one such committee.

debtor - the entity seeking protection from creditors under the bankruptcy laws.

debtor-in-possession - the debtor which remains in control of operations; as opposed to having a trustee operate the company.

default - the failure by an entity to abide by the covenants in a debt obligation or other agreement to which it is a party. The most common default is non-payment of interest or principal.

discharge (of indebtedness) - the satisfaction or elimination of the debts of the debtor by the bankruptcy court.

disclosure statement - a comprehensive disclosure document sent to creditors when they are asked to vote on a plan of reorganization in Chapter 11.

docket - the schedule on which the clerk of the court records all motions, pleadings, memoranda, orders and all other court filings.

effective date - the date on which a plan of reorganization is implemented; usually it occurs after all the conditions to a plan of reorganization have been satisfied.

exclusivity (period of) - a debtor in Chapter 11 has the exclusive right to file a plan of reorganization for the first 120 days of its bankruptcy. Thereafter, unless the period of exclusivity is extended by the court, other parties may file reorganization plans.

executory contract - a contract in which some or all of the obligations of each party have not yet been completed. The debtor-in-possession (or trustee) is allowed to reject unilaterally certain executory contracts.

fee examiner - appointed by the court to monitor fees paid to professionals in bankruptcy cases.

first meeting of creditors (341 meeting) - a mandatory meeting between creditors and the debtor. It is usually held within a month of the filing of bankruptcy but often occurs later when the debtor has filed its schedules of financial information.

impairment - when a plan of reorganization alters the contractual rights of a class of holders of claims, that class is deemed to be impaired. A class that is unimpaired is deemed to automatically accept a plan of reorganization.

insolvency - another term used to describe a firm that is failing; generally it means that a firm's liabilities exceed its assets or that it is unable to satisfy its obligations as they come due.

involuntary bankruptcy - a bankruptcy initiated by at least three creditors holding unsecured claims aggregating at least $5000 against the debtor. Data from the U.S. Administrative Office of the Courts subdivides bankruptcies into voluntary and involuntary.

joint administration - the combining of two or more bankruptcy proceedings for administrative convenience. Frequently, the cases of affiliated entities are jointly administered. Joint administration does not necessarily result in substantive consolidation (see below).

liquidating reorganization - an informal term for a Chapter 11 proceeding when the company is essentially liquidated through one or more asset sales.

liquidation - the dissolution of a company (or individual); usually operations cease and assets are sold by auction; Chapter 7 is usually employed for liquidations, business or personal.

liquidation value - the aggregate value of a business if its assets are sold piecemeal.

matrix - a mailing list of creditors of the debtor. Done as part of the forms filled out for a Chapter 11 case.

PACER (Public Access to Court Electronic Records) - a service provided by the court system that gives case filing information. PACER requires an IBM-compatible computer equipped with a modem.

plan of reorganization - the document setting forth how a bankrupt company plans to satisfy its creditors. The plan of reorganization is the cornerstone of a successful Chapter 11 bankruptcy.

post-petition - occurring after the filing of a petition.

preference - a payment by a debtor made during a specified period (90 days or one year) prior to the filing that favors one creditor over others. Preference payments can usually be recovered and returned to the debtor's estate.

prepackaged bankruptcy - a situation where a company and its creditors agree to a plan of reorganization before the company files a bankruptcy petition. In a true prepackaged bankruptcy, a plan of reorganization is circulated and approved by creditors before the petition is filed. The court then confirms the plan and the company emerges from bankruptcy quickly.

pre-petition - occurring before the filing of a bankruptcy petition.

priority claims - administrative expenses and salaries, wages, employee benefits, customer deposits and taxes which occurred pre-petition.

pro rata - proportionately.

proof of claim - form filed by a creditor setting out its claims against a bankruptcy debtor.

reorganization - the resolving of a Chapter 11 bankruptcy by the emergence of the debtor as a viable business. Generally, the company agrees with creditors on a plan for payment of their claims (plan of reorganization) and emerges from Chapter 11 after the plan is confirmed by the court. Retired Benefits Bankruptcy Protection Act - passed June 16, 1988. Allows the debtor to continue to pay insurance premiums for employees during the course of a bankruptcy.

secured creditors - one of two general types of creditors of a company. Secured creditors have a lien on property of the company. small claims (also sometimes called convenience claims) - under a plan of reorganization or liquidation, claims that are small (e.g. in the hundreds or thousands of dollars range) and numerous are often grouped into a single class and settled for cash for administrative convenience.

super-priority claim - an administrative claim that will be paid ahead of other administrative and priority claims.

United States Trustee - an agent of the U.S. Department of Justice appointed to assist in bankruptcy cases. The U.S. Trustee administers many of the duties of the court including appointing committees, appointing trustees and examiners, scrutinizing bankruptcy documents, etc. The United States Trustee Program was begun in 1979. Presently, it covers all federal judicial districts except for North Carolina and Alabama which are scheduled to be included in October of 2002.

unsecured creditor - one of two general types of creditors of a company. The unsecured creditors have no liens on the property of the company.

workout - an arrangement, outside of bankruptcy, by a debtor and its creditors for payment or re-scheduling of payment of the debtor's obligations. Usually applies to an informal agreement between a business and its creditors, although it can be a formal agreement and it can apply to consumer debtors also.