Bankruptcy Glossary Terms

Absolute Priority Rule

In general terms, the absolute priority rule of Section 1129(b) of the Bankruptcy Code provides that if a class of unsecured creditors rejects a debtor’s reorganization plan and is not paid in full, junior creditors and equity interest holders may not receive or retain any property under the plan. The rule thus implements the general state-law principle that creditors are entitled to payment before shareholders, unless creditors agree to a different result.

Adequate Protection

Adequate protection is relief, described in Bankruptcy Code section 361, that a debtor provides to a secured creditor. What is protected? The value of the secured creditor’s lien during the bankruptcy case. How is it protected? By the debtor making periodic payments or interest payments to the secured creditor; by the debtor granting secured creditor a replacement lien on other property; or by any other form determined by the court to be “adequate.” How can we tell that the protection is adequate? When it takes account of risks to the continued value of the lien.

Where the primary collateral is accounts receivable, a lender may be granted a “replacement lien” on the same or other receivables generated post-petition (the lender’s lien on accounts receivable is cut off as of the petition date – see section 552). Assuming that the replacement lien is on other receivables, the debtor then gets to spend the proceeds of the original receivables. If the debtor continues to generate replacement receivables at the same rate or higher as it spends the proceeds of original receivables, then the lender would be adequately protected.

Where the collateral is rental real property, the protection of the debtor using some of rents to preserve the real property may be deemed adequate, because the maintenance and upkeep of the building benefits the lender as mortgagee. Where the value of the real property substantially exceeds the amount of the secured debt, the lender is considered to have an “equity cushion” that by itself constitutes adequate protection, without further provision of anything by the debtor.

If the value of the collateral diminishes during the case, and the debtor is unable to provide adequate protection, the secured creditor may have grounds on which to lift the automatic stay and pursue its non-bankruptcy remedies with respect to the collateral. Note: to contend over adequate protection requires that the secured creditor have some measurement of value as of the beginning of the case. Determining that (by appraisal, by expert testimony, or by other means) should probably be on any secured creditor’s “to do” list with a troubled borrower even before a case is filed.

Administrative Expense Claims

Section 507 of the Code grants a higher priority of payment to “administrative expenses” than it does to any unsecured claims (leaving aside certain domestic support obligations). Thus, administrative expenses must be paid in full before any unsecured claims get paid at all. A chapter 11 plan may not be confirmed unless it proposes to pay administrative expenses in full upon the effective date of the plan.

How qualify for such a claim? Section 503(b) defines “administrative expenses” to include “actual, necessary costs and expenses” of various kinds that preserve the estate.  The provider of goods and services who seeks administrative claims status must move for allowance of its claim as administrative expenses, unless other procedures have been established by the court in the case, and must establish that its claim is “actual” and “necessary” upon the standard set by section 503(b). 

The high payment priority for administrative expenses in intended to support debtor reorganization or orderly liquidation by encouraging claimants to do business with or work for the debtor or trustee.  Examples of administrative expenses: (i) compensation and reimbursement given to the officers of the estate; (ii) fees for professional services for the bankruptcy estate, such as accounting or legal services; (iii) reasonable compensation for trustees; (iv) witness fees and mileage; (v) certain nonresidential real property lease expenses; (vi) the value of goods received by the debtor within 20 days before the case was filed (called “Section 503(B)(9) Claims”); and (vii) wages, salaries, or commissions for services rendered to the Debtor or (perhaps) a statutory Committee.    

There is no guarantee, however, of full payment.  Many a bankruptcy estate has become administratively insolvent (lacking sufficient funds to pay administrative expense claims in full).  That risk should be weighed by potential administrative expense claimant.

Article 9 Sale

A remedy available to secured creditors under Article 9 of the Uniform Commerical Code. Upon the debtor’s default, the creditor can sell its collateral either publicly or privately without judicial intervention.

Assignment for the Benefit of Creditors

An assignment for the benefit of creditors (“ABC”) is a state-law means of business liquidation that, where it makes sense to pursue, usually takes less time and expense than a bankruptcy case. ABCs are available in many, but not all, states.  They can involve judges or not, and can be set by statute or common law. An ABC is a trust agreement whereby the owner of a distressed company, the assignor,  irrevocably transfers title, custody, and control of (usually all of) its assets to an impartial third party, the assignee, who is a financial professional. The assignee communicates with creditors, initiates claims administration, liquidate the assets, and distributes net proceeds to the beneficiaries of the newly created trust — the assignor’s creditors.  To maximize the value of assets distributed to creditors, the assignee may operate the business for a time before selling the assets.  An ABC sale of personal property is often done in compliance with personal property foreclosure procedures set forth in Article 9 of the Uniform Commercial Code.

Automatic Stay

Upon the filing of a chapter 7 or a chapter 11 petition, a bankruptcy case starts.  With that start, a stop (or “stay”) is automatically imposed on creditor actions to collect debts from debtor or to control its property or operations – except within the bankruptcy case.  The foreclosure action, the collection calls, the post-judgment collection efforts, the perfection of security interests, and the acts to replace management per loan documents or bond indentures – all must cease.  If they do not, a debtor or trustee may seek relief (injunction, costs, damages, even punitive damages) from the court for willful violations of the automatic stay.  The automatic stay gives breathing room to a DIP and surcease to a debtor, and thereby in many cases helps preserve the going-concern value of the debtor – which can enhance creditor recoveries.  The automatic stay is said to outlaw the “race to the courthouse,” by which creditors thresh the debtor’s remaining assets in a legal tempest. 

The automatic stay does not apply to actions against a debtor that arise after the petition date, or to acts enumerated in section 362(b) of the Bankruptcy Code, which include governmental enforcement of its police or regulatory powers (as distinct from governmental purchase and sales, for example), and certain efforts by parties to certain securities contracts to close out open positions or set-off amounts due. 

A secured creditor may get at its collateral by successfully seeking in bankruptcy court to modify (or “lift”) the automatic stay under conditions set forth in the Bankruptcy Code, which relate to (among other things) deterioration in the value of collateral securing the creditor’s claim and to the necessity of the collateral to a reorganization of the debtor.

Bankruptcy Code

The Bankruptcy Code governs all bankruptcy cases.

Article 1 of the U.S. Constitution empowers Congress to make bankruptcy law. Congress exercised that power to enact new bankruptcy laws in 1800, 1841, 1867, and 1898.  Congress replaced the then-current law via the Bankruptcy Reform Act of 1978, including the Bankruptcy Code, which is codified as title 11 of the U.S. Code. The Bankruptcy Code was most recently substantively amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, often referred to as “BAPCPA.”

Bankruptcy Court

Under Article I of the Constitution, bankruptcy judges are appointed to 14-year terms.1 Each bankruptcy judge typically has a judicial assistant or secretary, a courtroom deputy (charged with managing the judge’s daily court calendar and related administration), and a law clerk. Many of a bankruptcy judge’s administrative affairs are managed by an office of the clerk of the court. The clerk’s office handles filings, manages case dockets, provides administrative assistance to attorneys working in the bankruptcy court, and generally ensures the smooth administration of cases before the court.

Bankruptcy Estate

A bankruptcy estate is created upon the filing of the bankruptcy petition. All of the debtor’s property and interests becomes part of the bankruptcy estate.

In a Chapter 7 case, the bankruptcy estate is administered by a trustee. In a Chapter 11 case, the bankruptcy estate may be administered by a Debtor in Possession or a trustee.

Bankruptcy Examiner

A bankruptcy examiner is a professional appointed by the court in certain cases to investigate certain aspects of the debtor or proceedings and report an analysis with such findings to the court.

Bar Date

In the context of a bankruptcy case, this refers to the date (set by the court) on or before which a proof of claim must be filed.  Otherwise, the claim may be barred and the claimant entitled to no distribution from a plan or from the proceeds of the liquidation of debtor’s assets.  Again, to distinguish this from the context, a creditor should not flirt with a bar date, but should compose its proof of claim and file it as soon as practicable, always keeping an eye on the case docket for any special case rules imposed on the filing of claims.

Cash Collateral

Cash that is subject to a security interest. To use such cash – almost always a pressing need – a debtor must get either consent from the secured lender or authorization from the bankruptcy court. Consent comes at the cost of concessions required by the secured lender (such as enhanced reporting obligations and periodic cash payments).  Where a court authorizes the use of cash collateral notwithstanding the secured lender’s refusal to consent, the secured lender is entitled to adequate protection of its collateral (usually in the form of payments or liens on unencumbered property) to compensate it for any deterioration of its collateral through the debtor’s use of it.

Chapter 11

Chapter 11 of the Bankruptcy Code governs reorganization cases for businesses and individuals not eligible for Chapter 13. A debtor under Chapter 11 will file a Chapter 11 plan to reorganize or liquidate its assets. Usually, the Chapter 11 debtor remains in possession of its assets and is called a Debtor-in-Possession.

For more detailed information, read Dealing with Corporate Distress 01: Hello Darkness, Our Dear Friend.

Chapter 11 Plan

A chapter 11 Plan sets forth the terms of a global novation among a debtor, its creditors, and its equity holders. A novation, in turn, is the act of replacing an obligation to perform with another obligation. So, a chapter 11 plan—once confirmedreplaces all of a debtors’ preexisting obligations with a set of new obligations, which are contained in the plan. There are several different types of plans. These include traditional chapter 11 and subchapter V chapter 11.

Chapter 11 Trustee

A chapter 11 trustee represents a bankruptcy estate, exercising statutory powers predominantly for the benefit of unsecured creditors while under the direct supervision of a U.S. trustee. They are not appointed in all chapter 11 cases, but can operate the debtor’s business or bring actions against certain creditors or the debtor to recover property to be distributed pro rata to creditors with valid claims against the estate.

Chapter 12

Chapter 12 of the Bankruptcy Code governs bankruptcy filings by family farmers or fishermen. Chapter 12 essentially provides a Chapter 13-style reorganization for people in these two professions that do not qualify for Chapter 13 relief because of the capital intensive nature of their businesses and the resulting high secured debt levels.

Chapter 13

Chapter 13 is a form of reorganization for individuals, primarily wage earners and small business owners. In Chapter 13, the debtor submits a portion of her post-petition earnings to pay pre-petition debts. In return, she gets protection against creditor action, and a chance to restructure some of her pre-bankruptcy debts.

Chapter 5 Causes of Action

The Bankruptcy Code empowers a trustee and debtor-in-possession with certain “avoiding powers,” codified in Chapter 5 of the Bankruptcy Code. Read more in this ABI Journal article.

Chapter 7

Chapter 7 of the Bankruptcy Code allows a trustee to take control of the debtor’s property and to liquidate it. The proceeds from the liquidation are then distributed to creditors.

Individual debtors must satisfy a means test.  The court will look at the debtor’s income and expenses to determine if the individual debtor can file a chapter 7 bankruptcy.

Chapter 7 Trustee

Immediately upon a business entity’s filing of a petition under chapter 7 of the Bankruptcy Code, the business entity becomes a “debtor” and its property becomes a chapter 7 “estate” in the custody of a chapter 7 trustee. The chapter 7 trustee is a lawyer or financial professional who has been selected on a rotating basis from a “panel” of chapter 7 trustees.  The debtor’s former ownership and management are ousted from control.  The chapter 7 trustee collects all assets of the debtor’s estate (which may include potential lawsuits against other parties, including special causes of action under the Bankruptcy Code) and administers it for the benefit of creditors.  Sometimes, the trustee hires lawyers to represent him or her in the case.  Under section 326 of the bankruptcy Code, the chapter 7 trustee receives compensation capped as a percentage of the estate property that is realized and disbursed to creditors.  Note: a chapter 7 trustee must be distinguished from a “chapter 11 trustee,” the U.S. Trustee, or the term “trustee” as used in the Bankruptcy Code to denote an entity that holds certain powers in administering the estate formed by the debtor’s property.

Chief Restructuring Officer (CRO)

A chief restructuring officer, or “CRO” is often a senior member of a restructuring firm appointed by stakeholders and given broad powers over the company’s finances and operations to restructure the debtor’s balance sheet, operations, or both.

A CRO may be specifically appointed for the purpose of managing a company’s affairs in a chapter 11 bankruptcy proceeding. In some chapter 11 cases, a CRO may be seen as an alternative to appointing a bankruptcy trustee to take over the debtor’s business, because the CRO is more directly knowledgeable about the company’s business, industry, and financial affairs.

Many CROs are turnaround advisors. But unlike outside turnaround advisors hired by a company on a consulting basis, CROs serve as officers employed by a company, with direct executive and decision-making authority to manage the company’s business.


A creditor’s right to a payment from the debtor. It may be secured by the debtor’s property or other collateral or it may be unsecured.


In large chapter 11 cases, the diffuse interests of a large number of creditors may be at stake. Bankruptcy law addresses potential collective action problems (see the brilliant  Mancur Olsen, Jr., The Logic of Collective Action: Public Goods and the Theory of Groups (1965)) by providing that the U.S. Trustee may appoint the membership of an official committee of unsecured creditors (often called “the committee”) having a fiduciary duty to all such creditors. The committee is usually composed of an odd number of the largest unsecured creditors that are willing to serve.  The committee hires lawyers (and sometimes financial advisors or other professionals) in order to monitor and challenge DIP activities, including by objecting to DIP financing arrangements proposed by the DIP and, in some circumstances, by proposing a plan of reorganization in competition to the DIP’s plan.   Committee expenses, including professional fees, are paid by the debtor’s estate.  An active committee can play a major role in the outcome of the case.  Sometimes other official committees will also be appointed (to represent specific kinds of creditors [retirees, bond-holders, warranty claimants] or even holders of equity).   Other groupings of parties, sometimes called “unofficial committees,” may also form and be active, though entirely on their own dimes.

Confirmed or Confirmation

Confirmation is the act of approving a chapter 11 plan by the Bankruptcy Court. Section 1129 of the Bankruptcy Code, in the context of a Traditional Chapter 11, requires the Bankruptcy Court to make a number of specific findings to “confirm” (approve) a plan and make it binding on all parties. They include determinations that the plan complies with all applicable law and has been proposed in good faith. See Bankruptcy Code §1129(a)(1)-(3). The Bankruptcy Court must also determine that the plan is feasible (i.e., that confirmation is not likely to be followed by liquidation). See Bankruptcy Code §1129(a)(11). Dealing with Distress for Fun & Profit— Installment #18—How to Confirm a Chapter 11 Plan explains confirmation requirements in detail. The standards for confirming Confirmation in the context of a Subchapter V Chapter 11 are set out in Bankruptcy Code §1191.

Contingent Value Rights

Contingent Value Rights are “an instrument committing an acquiror to pay additional consideration to a target company’s stockholders on the occurrence of specified payment triggers,” according to this article written by several attorneys at Wachtell, Lipton, Rosen & Katz.  First used in several high-profile transactions in the late 1980s, CVRs are now primarily used to “bridge valuation gaps relating to uncertain future events that would impact the target company’s value.”

Controlled Group

Under ERISA and the Internal Revenue Code, two or more entities with a certain level of common ownership or affiliation are treated as a single entity for purposes of liability to a pension plan or a union plan, among certain other rules applicable to benefit plans. These entities are called the “Controlled Group”. The PBGC backs pension plans to a certain extent, and will pursue claims against the employer and the controlled group to reimburse itself. Thus, insolvent Affiliate A could have been the employer of the current and future pensioners, but Affiliate B might also be on the hook for pension liabilities.

Credit Bid

To purchase one’s collateral without cash. The term “credit bid” is a colloquial term (it does not appear in the Bankruptcy Code) for a secured creditor’s right to bid at the sale of its collateral and then, at closing, to offset the purchase price by the value of its outstanding claim secured by the collateral being purchased. This colloquial term aptly describes a secured creditor’s rights as articulated in section 363(k) of the Bankruptcy Code.  A creditor with an allowed secured claim may credit bid at a sale of its collateral under a reorganization plan or outside a plan in a section 363 sale.

Section 363(k) provides that:

“At a sale under subsection (b) of this section of property that is subject to a lien that secures anallowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property.”

This subsection limits the credit bidding right to a holder of an “allowed” secured claim. Under section 502(a) of the Bankruptcy Code, a claim is “deemed allowed, unless a party in interest … objects.”  If a party objects (timely), the claim is no longer deemed allowed and may be allowed only after notice, hearing, and the court’s determination. Where resolution of a claim cannot occur timely and would unduly delay the administration of the case, the court may estimate the allowed claim (per section 502(c)(1)).

From section 363(k), the holder of an allowed secured claim gets two rights: (1) a right to bid; and (2) if it is the purchaser at such sale, it “may offset [its] claim against the purchase price.” At a plan sale or a section 363 sale of property of the estate (after proper marketing and notice), the holder of the allowed secured claim may bid for the property, and, if the trustee (or DIP) accepts that bid, the holder of the allowed secured claim may offset or setoff the contract price at closing by the amount of its allowed secured claim.  Therefore, if a secured creditor is owed more money than the value of the collateral, its credit bid alone may prevail at auction.

Section 363(k) provides that these two rights may be exercised “unless the court for cause orders otherwise.”  The bankruptcy court “for cause” may order that the right to bid or the right to offset shall be modified or denied. “Cause” is not defined in the Bankruptcy Code.  What counts as “cause” in this context is recently controversial.  Parts of this definition are paraphrased from In re RML Dev., Inc., 2014 WL 3378578, * 2-3 (Bankr. W.D. Tenn. July 10, 2014).


Immediately upon filing a bankruptcy petition, the person, entity or business becomes a debtor in the bankruptcy proceeding. The property of the debtor becomes the bankruptcy estate.

In the case of a Chapter 11 bankruptcy, the debtor will become a debtor-in-possession and continue to administer the bankruptcy estate.

Outside of bankruptcy, the term “debtor” is commonly used to refer to a company that is the borrower under a loan agreement or, more generally, to any party who owes another party (the other party being the “creditor”) a debt.

DIP Loan/ DIP Financing

Also called “DIP financing,” a DIP loan is a line of credit or other credit provided to a DIP during a bankruptcy case, based upon meticulously-drafted DIP financing agreements that are reviewed by the bankruptcy court (and often the U.S. Trustee and any Committee) for, among other things, compliance with section 364 of the Bankruptcy Code.  Because the DIP needs the money – bad – to reorganize, and because few lenders provide such financing, and because often only one lender (the DIP’s pre-petition lender) knows the DIP well enough to intelligibly assess credit risk under the time constraints, the terms of DIP loans tend to look pretty one-sided. Section 364 countenances various special protections for DIP lenders, including priority of payment equal to or even superior to that of administrative claims, or even superior to any other liens on DIP property.

DIP or Debtor-in-Possession

Immediately upon a business entity’s filing of a petition under chapter 11 of the Bankruptcy Code, the business entity becomes a “debtor-in-possession” or “DIP” ( a type of “debtor” within the lingo of bankruptcy) and its property becomes a chapter 11 “estate” in the custody of the DIP.  No trustee is appointed unless a party successfully moves for the appointment of a chapter 11 trustee, based upon certain problems, bad acts, or misadventures involved in DIP functioning.  To confuse the nomenclature further, section 1107(a) of the Bankruptcy Code provides that a DIP has (most of) the rights, powers, and duties of a “trustee” – and so Bankruptcy Code sections that refer to what  a “trustee” can or must do often apply to DIPs as well.  In a chapter 11 reorganization case (where the DIP is not to be liquidated), counsel for the DIP (appointed with court approval) often assumes tactical command of the case, with varying levels of interaction with counsel for major secured creditors and of any unsecured creditors committee.


EBITDA stands for “Earnings Before Interest, Taxes, Depreciation and Amortization”. Because it eliminates the effects of many financing and accounting decisions, EBITDA can be used to analyze and compare profitability between companies and industries.

Executory Contract

An executory contract is any agreement for which the debtor and its counterparty have material obligations remaining after the petition date. An “unexpired lease” is an executory contract. Real estate leases, equipment leases, licenses of intellectual property, and employment agreements are common types of executory contracts. Non-debtor counterparties to executory contracts are obligated to continue performing under the contracts (even though the bankruptcy debtor may not be current with payment) unless and until the contract is rejected by the debtor through a Bankruptcy Court order (or the contract expires under its ordinary terms). A contract rejection is considered to be a breach of the contract as of the petition date.  A rejection releases both the debtor and the counterparty from further performance under the contract (though real property lessees and intellectual property licensees may elect to retain their rights under some circumstances).  Upon rejection, the counterparty obtains an unsecured claim for rejection damages (amounts owed to it under the contract that are not administrative claims, subject to special limits under some circumstances). On the other hand, if the debtor intends to continue performing under a contract, it must formally assume that contract through an approval order which will compel the debtor to pay all outstanding pre- and post-petition amounts due and past due under the contract (known as the “cure” payment). Upon court approval, the debtor may sell or “assign” its interest under an assumed contract to a third party, provided that the assignee can provide the counterparty with adequate assurance of future performance.

The concept of rejection is not as straightforward as it may seem. For example, On May 20, 2019, the United States Supreme Court held that under Section 365 of the Bankruptcy Code, a debtor’s rejection of a trademark license does not revoke the license and the licensee can continue to exploit the licensed trademark. On first blush, this may appear contrary to the basic principles discussed above.

First Day Declaration/ First Day Affidavit

A sworn declaration or affidavit submitted in conjunction with a debtor’s First Day Motions, and lays out the factual background of a chapter 11 debtor’s business history, financial affairs, and reasons for filing for bankruptcy relief. First Day Declarations are typically incorporated by reference into each First Day Motion submitted by a chapter 11 debtor.

First Day Declarations are usually submitted by a member of the debtor’s C-level management team or an outside consultant (often a Chief Restructuring Officer) employed by the debtor for the purpose of managing the debtor’s restructuring efforts.

First Day Motions

First day motions are filed on (or close to) the first day of a chapter 11 case—usually presented on an emergency basis—to grant a debtor relief from the restrictions of the Bankruptcy Code that otherwise inhibit the debtor’s ability to operate in the ordinary course of business.

The relief sought by First Day Motions ensures that a chapter 11 debtor can continue operating its business with as little interruption as possible to achieve its goals in chapter 11.

Common first day motions include requests for orders that allow a chapter 11 debtor to do things like: use encumbered cash or borrow money on a postpetition basis; maintain cash management systems; continue paying employee wages and maintaining benefits programs; continue utility services; pay prepetition taxes; pay prepetition insurance amounts; and other administratuve functions within the chapter 11 case.

Floating-Rate Note

Floating-rate notes, sometimes referred to as “floaters” or “FRNs” most often pay interest quarterly, and at a spread priced to the LIBOR rate. This type of coupon is popular amid an environment of rising interest rates, such as 2004 and 2005.

Forbearance Agreement

In a forbearance agreement, the borrower acknowledges that it has defaulted on its obligations, while the lender agrees that it will refrain from exercising its remedies for such defaults as long as the borrower performs or observes the new conditions set out in the forbearance agreement, and, by a certain date, cures the defaults. A forbearance agreement entered into after a maturity date default would typically provide that the lender will not exercise its rights arising from the default provided the borrower pays the lender the loan principal in installments over a stated period of time, often at a much higher rate of interest than under the original loan agreements. The lender may wish to impose additional conditions, such as requiring borrower to meet new or enhanced financial covenants or to pledge additional collateral to secure its repayment obligations.  If the borrower fails to live up to the terms of the forbearance agreement, the lender may sue the borrower for a breach of that agreement and may also exercise any of its rights under the original defaulted loan agreements.  Compare the forbearance agreement with the Glossary definition of “loan amendment agreement.”

Going Concern Note

A “Going Concern Note/Warning/Statement” is a disclosure, generally made by a publicly traded company in their required SEC reporting, advising the public that the company’s prospects to continue operating for the foreseeable future (i.e., to remain as a “going concern”) are impaired. Such a statement, setting forth the reasons for the apprehension, are mandated by the SEC so that investors and potential investors may be adequately forewarned about the possibility of a bankruptcy or other major restructuring jolt coming down the road if conditions do not improve.

Involuntary Bankruptcy

A bankruptcy case may be filed against a debtor under chapter 7 or 11 of the Bankruptcy Code.  The debtor may challenge the filing and the petitioning creditor(s) may have to post a bond to cover the debtor’s potential damages. If the debtor’s challenge succeeds, that petitioning creditor(s) may be liable for consequential or even punitive damages. If the debtor loses or does not make that challenge, an order of relief will be entered and the case will proceed as if it had been initiated by the debtor.

To be an involuntary debtor, a debtor must be otherwise eligible to be a debtor under chapter 7 or 11 (i.e., is not a bank, credit union, or insurance company, among other things) and may not be a farmer or non-profit corporation. The petitioning creditor(s), if challenged, will have to prove that at the time of the petition, the debtor was generally not paying its debts as they came due or that within 120 days previously, a custodian (receiver, assignee, liquidator, etc.) had been appointed or took possession of substantially all of the debtor’s property.

If the debtor has fewer than 12 creditors, then one creditor who has a non-contingent and not validly disputed claim above the statutory minimum may initiate the case.  If the debtor has 12 or more creditors, then three such creditors must join in the petition.  See 11 U.S.C. § 303 and Jonathan Friedland, Elizabeth Vandesteeg and Christopher Cahill, eds. Commercial Bankruptcy Litigation (2d Ed. Thomson Reuters, 2015) §§ 4:17-39.

Read more on this topic in Getting Over the Scariness of Filing an Involuntary Bankruptcy Petition.

Ipso Facto Clause

The term “ipso facto” means “by the fact itself” in Latin. In the bankruptcy context, an ipso facto clause in a contract provides that the contract is terminated (or modified) merely by the fact itself that the other party filed a bankruptcy case. Section 365(e)(1) provides that ipso facto clauses in executory contracts (i.e., contracts in which performance remains due by both parties) are not enforceable.  However, section 365(e)(2) provides exceptions to that bar: an ipso facto clause may be enforceable if “applicable law” excuses a non-debtor party from accepting performance from or rendering performance to the debtor or any assignee of the debtor over the non-debtor party’s objection. “Applicable law” refers to non-bankruptcy law.  Consider a personal services contract – state law likely excuses a non-debtor diva assoluta opera soprano from rendering performance to a person or entity (say, a shopping mall) to which the debtor opera house  had assigned its contract rights.  Ipso facto issues are frequently seen in the intellectual property realm, in which the non-debtor licensor is anxious to curtail a debtor-licensee’s right in bankruptcy to assume and perhaps assign the license to a third-party, without the licensor’s consent.  Courts are split as to whether a debtor-licensee may assume an executory contract with an ispo facto clause over the objection of the non-debtor licensor. Reuel D. Ash contributed to this definition.

Key Employee Incentive Program (KEIP)

A program designed to incentivize particular performance (preferably measurable) from a specified group of employees. Chapter 11 debtors may seek approval of a KEIP (pronounced “keep”) as a means of retaining certain senior management otherwise likely to seek new employment.

KEIPs often include specific performance targets that eligible employees must meet/exceed before being paid, and may be based on specific case events, such as the consummation of a § 363 sale, or the achievement of certain financial metrics.

Key Employee Retention Program (KERP)

A program designed to retain a specified group of employees. A KERP usually contemplates the payment of a fixed lump sum, either on a one-time basis or a fixed, regular basis (i.e., a retention or “pay-to-stay,” bonus).

Chapter 11 debtors may seek to have a KERP approved as a means of retaining key employees through a specified term, as a means of retaining administrative and managerial continuity during a chapter 11 case.

Qualifications to receive payments under a KERP are typically only tied to an employee being or remaining in a debtor’s employee through a specified date, or the occurrence of a future event, like the consummation of a § 363 sale.

Loan Amendment Agreement

A loan amendment agreement changes the terms of the original loan agreements and eliminates or prevents an incipient default. Suppose that the borrower fails to repay the entire principal due on the maturity date of a loan.  In response, the lender could agree simply to give the borrower more time to repay the loan — by amending the loan agreement and promissory note to extend the maturity date to some future date.  By amending the loan agreements in that manner, the lender would effectively eliminate the default and the lender’s rights arising from the default.  Thus the lender would no longer be entitled, for example, to accelerate repayment or to charge a higher, or “default rate” of interest as a remedy for the (now wiped clean) default.  Compare the loan amendment agreement to the Glossary definition of “forbearance agreement.”

Make-Whole Premiums

Make-whole call premiums are prevalent in high-yield debt instruments. The feature allows an issuer to avoid entirely the call structure issue by defining a premium to market value that will be offered to bondholders to retire the debt early. The lump sum payment will be composed of the following: the earliest call price and the net present value of all coupons that would have been paid through the first call date, which is determined by a pricing formula utilizing a yield equal to a reference security (typically a U.S. Treasury note due near the call date), plus the make-whole premium. According to Standard & Poors, the make-whole premium is typically 50 bps.

Payment-in-Kind Notes

Some notes allow for a coupon to pay “in-kind,” or with additional bonds rather than cash. Like zero-coupon bonds, these securities, sometimes referred to as “PIK” notes, give the issuer breathing room for cash outlay. PIKs allow a company to borrow more money without immediate cash flow worries. Therefore, PIKs are viewed as more highly speculative debt securities.


PBGC stands for the Pension Benefit Guaranty Corporation, which is a federal agency, established as a not-for-profit corporation, and is charged with administering certain pension plans and union plans under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA). The PBGC essentially insures and guarantees benefits under certain pension plans up to a certain level, and for such insurance, employers periodically pay premiums to the PBGC.

Petition Date

The Petition Date is the date a debtor files a petition for relief under the Bankruptcy Code. The debtor’s assets as of the petition date become property of the estate. The petition date also determines the date by which all creditors’ claims are measured. Any claim occurring prior to the petition date is deemed to have occurred pre-petition. Any claims occurring after the petition date occur post-petition.


See “Chapter 11 Plan

Prearranged Chapter 11

The hallmark of a prearranged chapter 11 is that it is one in which the debtor enters bankruptcy after having negotiated the terms of a plan with its major stakeholders. Such agreement is commonly memorialized in a document commonly referred to as a “lock-up” or “plan-support,” agreement. Read “A Primer on Plan Support Agreements & Restructuring Support Agreements” for more information about such agreements.


Anathema to trade creditors. Under section 547(b) of the Bankruptcy Code, a DIP or a trustee may sue a recipient of certain payments it received from the debtor immediately before the beginning of the bankruptcy case, in order to avoid and recover those payments, which would then (in most cases) be distributed to unsecured creditors of the debtor. Under section 546(b), the DIP or trustee may avoid:

any transfer of property of the debtor

a) to or for the benefit of a creditor
b) for or on account of an antecedent debt
c) made while the debtor was insolvent
d) made within 90 days before filing or, if the transferee creditor was an insider, within one year before the beginning of the bankruptcy case
e) that enables such creditor to receive more than the creditor would receive in a chapter 7 liquidation.

There are defenses to avoidance and some are found in section 547(c) [e.g., new value, ordinary course of business].  Section 550 of the Bankruptcy Code empowers the DIP or trustee to recover the property transferred or its equivalent in money.

Prepack/Prepackaged Chapter 11

A prepack is a chapter 11 plan that a debtor prepares in cooperation with its creditors and which enough creditors and equity holders approve of, prior to the Petition Date, such that the parties know that the voting requirements of Bankruptcy Code §1126 will be satisfied. Such a chapter 11 plan is commonly filed together with the chapter 11 petition on the Petition Date. A successful pre-pack can be much shorter in duration than other chapter 11 cases (the shortest case in history, led by Kirkland & Ellis partner, Jon Henes, was over in less than 20 hours). A prepack addresses problems with debtor’s balance sheet but does not directly address operational weaknesses. Read “Balance Sheet Restructuring & Operational Restructuring” for a short explanation for more information.

Professional Fee Carve-Out

Professional advisors to a bankrupt company (or debtor) face a risk that they will not be paid their fees and expenses because the debtor estate’s only assets will be encumbered by a secured creditor’s (or DIP lender’s) first-priority lien. To deal with this risk, professionals frequently negotiate a “carve-out” to provide for the “super-priority” treatment of their allowed fees. The carve-out is essentially an agreement by the secured creditor to subordinate its lien and claim to certain allowed professional fees. This agreement thus permits those fees to come first in line in terms of payment from the estate’s assets.  Carve-outs are normally subject to a dollar-amount cap and sometimes provide for limits regarding the services that can be paid from the carve-out.

Proof of Claim

Before the bankruptcy case, the creditor had a debt to collect, lawsuit, potential lawsuit, grievance, gripe about slow payment, mounting costs caused by debtor’s conduct or failure to act, or (and?) some other right to payment or other legal or equitable remedy that gives rise to a right to payment. The bankruptcy case begins, and now the creditor now has a claim.  The creditor pursues payment of the claim by filing a proof of claim with the bankruptcy court, then fighting off any objection, and then awaiting distribution under a chapter 11 plan or from the proceeds of liquidation of debtor property.   Note: filing the proof of claim on time is crucial to the creditor getting anything (with some exceptions, but why take that chance?).  The timely and meticulous preparation of a proof of claim can clarify the creditor’s stake and strategy, as well as cause it to assemble timely all relevant documentation of the claim (for use contra an objection).  The creditor should review the case docket for any court order that establishes a Bar Date (see Glossary entry), or which sets special procedures for filing proofs of claim, say with a Noticing and Claims Agent (as is done in many large cases).

Real Estate Investment Trust (REIT)

A Real Estate Investment Trust (REIT) is a security which trades like stocks or bonds on various exchanges and which constitutes an interest in real estate. REITs can either represent a “direct” investment in the form of an Equity REIT, in which the interest holders have equity ownership in the property and thus collect dividends from rent collected on the property, or an “indirect” investment through a Mortgage REIT in which mortgages are held (either generated as an initial loan or purchased from a prior mortgage holder) and income is generated from the interest collected. Hybrid REITs, which engage in both these types, can also be created. Their exemption from paying corporate income taxes, and requirement to disburse 90% of their would-be-taxable income in the form of dividends, make them an attractive investment vehicle.

Roll-Up Financing

A “roll-up” refers to a debtor-in-possession (or DIP) financing facility that is provided by the debtor’s prepetition (pre-bankruptcy) lenders and effectively pays off (or “rolls-up”) the prepetition secured debt. The roll-up can take place in a single stage or the debtor, as postpetition funding is obtained, applies an equivalent amount of proceeds first to the repayment of the prepetition facility until the outstanding obligations are fully “rolled” into the postpetition facility by the debtor. A roll-up effectively transforms the existing lenders’ prepetition claims into a postpetition, administrative expense.

Schedules & SOFA

Every debtor in a bankruptcy proceeding must file schedules and a statement of financial affairs, or “SOFA” disclosing financial information about the debtor as of its petition date. There are different forms of each depending on whether the debtor is an individual person or a business.

In its schedules, a debtor must list its specific assets, liabilities, and other key information about its business, such as existing executory contracts and unexpired leases, and the identity of any co-debtors it may have.

In its SOFA, a debtor must make additional disclosures about its business financial history, including information about prepetition transfers of assets, income earned in the years preceding the bankruptcy, pending legal actions, and other relevant financial information. The SOFA dives into your financial matters so that the court can fully grasp the financial situation causing you to file.

Together, the schedules and SOFA create a financial “snapshot” of a debtor as of its petition date.

Section 341 Meeting

A potentially great information source for creditors, and possibly a chance for a DIP to re-assure creditors. Within a reasonable time after a bankruptcy case starts (including both chapter 7 and chapter 11 cases), the U.S. Trustee convenes a meeting of creditors and equity holders under section 341 of the Bankruptcy Code. A representative of the DIP or debtor is placed under oath and must answer questions posed by, among others, the creditors that are present.  The DIP or debtor is often made to explain why it filed and what it plans to do in the case.  Usually, the Schedules and SOFA have already been filed, giving parties the chance to query the DIP or debtor under oath as to discrepancies or seeming omissions.

Section 363 Sale

A sale conducted per section 363(b)(1) of the Bankruptcy Code outside of the ordinary course of the business of the debtor, and not under any plan of reorganization. By a section 363 sale, a debtor (as DIP or via a chapter 7 trustee) may sell substantially all of its assets, or any part of its assets (e.g., a business line, a machine, intellectual property, etc.).  As occurred in the General Motors and Chrysler chapter 11 cases, a debtor may sell its business or part of it as a going concern.  Very often, section 363 sales are accompanied by competitive bidding or even a more-or-less formal auction process.  In larger sales, the debtor may propose bidding procedures for approval by the court.  Creditor parties will scrutinize such procedures to ensure that they warm rather than chill the chances for the highest sale price.  Sometimes the bid procedures are tied to the existence of a “stalking horse bidder,” i.e. a party that has bound itself to purchase the assets at a price certain if no other qualified bids exceed that price.

Section 363 sales are attractive to bidders in part because section 363(f) can be applied to provide that the sale is free and clear of all liens, claims, and encumbrances on the sold assets – all those “interests” would then attach to the proceeds of the sale rather than the assets.  Further, section 363(m) can be applied to limit the ability of discontented parties to undo the sale of assets to a good faith purchaser: no such appeal is permitted unless the authorization of the sale is stayed by the court pending such appeal.

Editor’s note: For more information on “stalking horse bidders” read 90 Second Lesson: To Stalk or Not to Stalk? Why be a Stalking Horse Bidder?

Section 503(b)(9) Claims

Section 503(b)(9) was added to the Bankruptcy Code as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), which took effect in October 2005. Section 503(b)(9) grants vendors an administrative priority claim for “the value of any goods received by the debtor within 20 days before” the date the bankruptcy petition was filed, as long as “the goods have been sold to the debtor in the ordinary course of such debtor’s business.” Section 503(b)(9) is intended to encourage suppliers to continue shipping goods to a customer even when a customer’s bankruptcy is imminent, which serves to preserve the value of the debtor’s business and enhances its prospects for reorganization.

For suppliers, a Section 503(b)(9) Claim can spell the difference between receiving no or minuscule repayment (on a general unsecured claim) and being paid 100% of the value of the goods delivered in the 20-day period before a customer’s bankruptcy (as an administrative expense claim). Section 503(b)(9) transforms this subset of the supplier’s claim into an administrative expense claim, to be paid at the same priority as the debtor’s professionals and all providers of goods and services to the debtor during the bankruptcy case.  To be confirmed, a chapter 11 plan of reorganization (or liquidation) must pay administrative expense claims in full.  Potential issues: (a) did vendor deliver the goods within the 20 days?; (b) is the vendor’s claim for goods or for services?; and (c) what is the value of the goods?  Also, if the chapter 11 case is converted to a case under chapter 7 of the Bankruptcy Code, there is no requirement that chapter 11 administrative claims be paid in full.  If the chapter 11 case is dismissed, the Section 503(b)(9) Claims also cease to exist.

Secured Claim

A claim held by the creditor that is secured by a lien on, a mortgage on or other security interest in property of the debtor.

Stalking Horse Bid

A stalking-horse bid is an initial bid on a bankrupt company’s assets from an interested buyer chosen by the bankrupt company to participate in a section 363 sale or a sale conducted under a plan of reorganization. The stalking horse bidder often executes a contract wherein it commits to purchasing a defined set of assets for a specific price, unless a higher and better offer is received by the bankruptcy estate.  Through a stalking horse bid, an estate establishes both a floor price and a model asset purchase agreement with terms to which the estate would agree. Thus a stalking horse bidder can be key to the estate’s capture of value from its assets.  For a look at other ways a stalking horse bid can play out, see “Stalking Horse Bidder in Section 363 Sales: Benefactor or Predator?” (May, 2015).

Strong-Arm Powers

Where a creditor has an unperfected lien (or an unrecorded mortgage) on a bankruptcy debtor’s property, the Bankruptcy Code empowers a trustee (or DIP, or entity that succeeds to the rights of a trustee or DIP) to avoid and preserve the lien for the benefit of the debtor’s bankruptcy estate. The trustee exercises this power through two strong arm provisions. First, the trustee may avoid the unperfected lien based upon its statutorily-granted status as judicial lien creditor or as bona fide purchaser of real property.  11 U.S.C. § 544(a)(1) & (3).   Second, under section 551 of the Bankruptcy Code, the trustee has the right to preserve the avoided interest for the benefit of the debtor’s estate.  The estate is thus put into the shoes of the creditor whose lien is avoided.  With these powers, the trustee may avoid the unperfected liens and apply the value represented by those liens to the debtor’s estate, bypassing junior lienholders.    A second mortgagee does not benefit from the trustee’s avoidance of the lien of the senior mortgagee – unsecured creditors do.  Parts of this definition are paraphrased from In re Traverse, 753 F.3d 19, 26 (1st Cir. 2014).

Subchapter V Chapter 11

A Chapter 11 case governed by Subchapter V of Chapter 11, which is set forth in Bankruptcy Code §§1181–1195.


A claim granted special priority status to a claim arising after a bankruptcy filing occurs, allowing for such claim to be paid ahead of all other pre- and postpetition claims, including administrative and priority claims. In other words, a superpriority claim is a claim that trumps other administrative claims.

Superpriority claims may be administrative in nature (such as a professional fee carveout) or a secured claim, such as the claim of a lender providing postpetition DIP financing to a debtor.

Supersedeas Bond

A supersedeas bond is best remembered by its nickname, “the defendant’s appeal bond.” They are a type of surety bond that a losing defendant is generally required to post if it wants to delay paying a judgement until after it receives a ruling on its appeal.

See Fed. R. Civ. P. 62(d); and Fed. R. App. P. 8(b).

Trade Reporting and Compliance Engine® (TRACE®)

The Trade Reporting and Compliance Engine is the FINRA developed vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities. All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under an SEC approved set of rules.

NASD introduced TRACE (Trade Reporting and Compliance Engine) in July 2002 in an effort to increase price transparency in the U.S. corporate debt market. The system captures and disseminates consolidated information on secondary market transactions in publicly traded TRACE-eligible securities (investment grade, high yield and convertible corporate debt) – representing all over-the-counter market activity in these bonds.

TRACE data can be accessed and searched on FINRA’s website:

Traditional Chapter 11

A Chapter 11 case that is not a Subchapter V Chapter 11.

U.S. Trustee

The Office of the U.S. Trustee is a division of the Department of Justice. The U.S. Trustee for any given “region” is the head of the Office of the U.S. Trustee (the UST) for that region. The U.S. Trustee is authorized to appoint and supervise chapter 7 panel trustees, appoint the membership of official committees in chapter 11 cases, and investigate bankruptcy fraud and abuse.  The U.S. Trustee (through its locally posted and federal government-employed attorneys) can be heard on any issue in a bankruptcy case, and is often active on issues and in circumstances in which the interests of creditors are not clearly represented, such as early in a large case or with respect to applications to employ and compensate professionals at any stage in a case.

Unexpired Lease

The term “unexpired lease” refers to a lease of personal or real property that has not expired as of the filing of a bankruptcy case.  If a lease is an “unexpired lease,” the chapter 11 debtor party is empowered by the Bankruptcy Code to assume (and possibly assign) or reject the lease.  The debtor-tenant under an unexpired lease of real property has the right to operate in the leased premises prior to the lease being assumed or rejected (and afterward, if debtor-tenant assumes but does not assign the unexpired lease).  In chapter 11 cases, the debtor-lessee may assume or reject an unexpired lease of residential or personal property at any time before confirmation of a chapter 11 plan.  Section 365(d)(4) provides that a debtor- lessee of non-residential real property must assume or reject the lease within 120 days (which deadline can be extended by 90 days upon the debtor’s motion for cause), or the lease is automatically rejected and the property must be surrendered.  Section 365(d)(1) provides that if a chapter 7 trustee does not assume or reject an unexpired lease of residential real property or personal property of the debtor within 60 days after the filing of the case, such lease is considered rejected.  But what is an “unexpired lease” to which these rules pertain?  The term is not defined in the Bankruptcy Code.  Whether a particular lease is “unexpired” is determined under state laws, which vary across states.  For example, a real property lease may not be considered to have expired in certain jurisdictions until an order of possession in the landlord’s favor has been entered by a court.

Unsecured Claim

A bankruptcy claim which is not secured by a lien, mortgage or other security.


The federal Worker Adjustment and Retraining Notification Act (WARN) provides the basis for claims against an entity that closes a plant or business or lays off lots of workers. The WARN Act requires most employers with 100 or more employees to notify affected employees (and managers, salaried workers, plus certain state and union officials) 60 calendar days before plant closings and mass layoffs. Workers, their representatives, and units of local government may bring individual or class action suits against employers believed to be in violation of the WARN Act. An employer may be liable to each employee for an amount equal to back pay plus benefits for the period of the violation. Failure to provide required notice to local government could subject the employer to a civil penalty. The WARN Act has a number of exceptions to its requirements that debtor-employers seek to apply, and on which bankruptcy courts rule. Many states have state laws similar to the WARN Act.  Kory Buzin contributed to this entry.

Workouts/ Out of Court Workouts

Distress transactions handles outside the supervision of a court.

In a workout, a debtor and its creditors informally and privately negotiate repayment terms and conditions. Workouts are typically memorialized under forbearance agreements with secured lenders, or other contractual agreements with creditors.