Terms and Definitions for Those Considering Bankruptcy

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a legal procedure that allows businesses to reorganize under a court-approved plan. Chapter 11 bankruptcy allows business entities protection from creditors during the reorganization period.

Chapter 13 Bankruptcy

Under Chapter 13 bankruptcy, a creditor repays debts under a three- to five-year plan that is supervised by the bankruptcy court. Chapter 13 bankruptcy was encouraged by the 2005 revision to bankruptcy law, which sought to force more debtors to repay debts.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common type of bankruptcy filing for individuals who can no longer pay their bills. While this legal procedure allows debt to be discharged, it is ruinous to credit records, meaning that future loans will be very expensive, if they can be found at all.

Collection

A credit card issuer will move a credit card balance to an internal or external collections agency if there is a past-due amount on a credit card that must be repaid. When a balance is in collections, this will damage a person’s credit score and make it difficult to borrow either on other credit cards or bank loans without having higher interest rates.

Default

Default is to fail to make the minimal payment on a credit card by the due date. If this occurs, credit card issuers may raise interest rates to the default rate, decrease the line of credit, or send the balance to collections. Depending on the creditor, a credit card will not typically be place in collections until a payment is 3 to 6 months delinquent. In situations of serious delinquency, the creditor may take legal action or garnish wages to enforce repayment.

Default APR or Penalty Rate

If a payment is made late on a credit card balance, the standard APR that was set at the beginning of the contract may increase to the default APR or penalty rate. This is typically much higher than the original APR. The default APR may be applied to all outstanding balances on the credit card account.

Secured Credit Card

Credit card used by people trying to rebuild their poor credit or by beginners establishing their credit. The cardholder's savings deposit or bank account guarantees payment of the outstanding balance if he defaults on payments. Credit line will represent 50-100% of the security deposit. Many have application and processing fees.

Subprime Credit Card

A credit card designed for those with little credit history or bad credit. These types of bad -credit credit cards typically carry higher fees and interest rates to offset the increased risk involved with subprime lending.

Time-Barred Debt

Time-barred debt is a type of old, unpaid debt. Every state has a statute of limitations that sets a limit on how long a creditor can get a court judgment forcing repayment of credit card debt. Typically this allotted time is three to 10 years, depending on the state. Debt that is older than this allotted time is considered “time-barred debt.” This debt does not go away. See 'Zombie Debt.'