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Cleveland TN Bankruptcy Law Blog

The pros and cons of a Chapter 7 bankruptcy

When residents of eastern Tennessee begin to consider seeking relief from their creditors by filing a petition for bankruptcy, they are faced with choosing between a Chapter 7 petition and a Chapter 13 petition. The choice is made more difficult because all Chapter 7 filers must demonstrate that their income is below the income limit for such petitions. The exact calculation can be complex, but the general rule of thumb is that a person cannot pass the means test if his or her income is more than the median income for a similarly sized household in Tennessee. Assuming that the potential bankruptcy filer can pass the means test, the relative pros and cons of a Chapter 7 bankruptcy are set out below.

A Chapter 7 proceeding can eliminate many debts forever, most notably credit card obligations. Some debts, such as child support and student loan debt, are not subject to discharge, but the order for discharge will provide relief from a great many other types of debt. A Chapter 7 discharge will also bar creditors from engaging in aggressive debt collection actions. One of the significant advantages of Chapter 7 involves a person's residence: if the debtor is not living in a dwelling that is security for a mortgage loan, then a bankruptcy proceeding is not likely to affect the debtor's obligation to make payments on such a loan.

Clothing maker changes hands after bankruptcy

Few people are aware that Cleveland, Tennessee is the home of one of the oldest men's clothing manufacturers in the United States. Even fewer people are likely aware that the firm has changed hands for the second time in five years. And yet fewer people are aware that the company plans to add 100 new jobs to make uniforms for the United States Army.

The company, Hardwick Clothes, filed a bankruptcy petition in 2014. The company was saved from dissolution when one of Cleveland's most prosperous investors, who is also the owner of a payday lender named Check Into Cash, purchased the company's assets for $1.9 million. The new owner kept the company's 200 workers and continued operations at the company's 174,000 square foot plant in Cleveland. Various changes in men's clothing markets, especially the movement to less formal wear at places such as work and church, reduced Hardwick's ability to operate profitably.

Bankruptcy's "fresh start" is a myth to many debtors

Bankruptcy filers in Tennessee and elsewhere are having surprising difficulty shaking off old financial habits and truly escaping from the overburden of debt that has cramped their lives. According to several studies of the status of the post-bankruptcy financial status of persons who have obtained relief under either Chapter 7 or Chapter 13, the discharge of their debts has not provided the immediate financial relief that they expected. The reasons are diverse.

A professor who has assisted presidential candidate Elizabeth Warren has studied bankruptcy filers for 25 years. She believes that more people who are in financial difficulty should file a bankruptcy petition and that they should do so without waiting for some kind of miracle. These people tend to postpone bankruptcy and instead take money from their retirement plans. This practice simply makes the financial hole deeper.

New partner allows local brewery to reopen

One of the principal reasons that small businesses in Tennessee seek bankruptcy protection is the lack of adequate operating capital. The product is valued by consumers, the employees enjoy the work, marketing and distribution are sound, but the company lacks the money to expand its share of the marketplace. In such cases, an aggressive competitor can erode the company's market share and force it into commercial bankruptcy. While bankruptcy seems like a dire fate for any business, some companies facing bankruptcy are able to find new sources of financing and are able to reopen instead of liquidating its assets.

An example of such a seemingly miraculous rebirth has recently occurred in Nolensville, Tennessee. Mill Creek Brewing Co., a small brewery located in Nolensville, closed operations in early November of this year and announced that it was filing a bankruptcy petition. Two weeks later, the company's CEO announced the reopening of its operations.

Borrowing money after a bankruptcy discharge

When residents of Western Tennessee file a petition for a Chapter 7 bankruptcy, they ordinarily look forward to the day when the order for discharge is entered, making them debt free. Another reason for looking forward to the discharge order is the chance to rebuild a credit score and obtain a fresh financial start. And, according to a recent report, a bankruptcy may be one of the best times to borrow money to begin the process of rebuilding a credit score.

Some lenders will refuse to lend money until the bankruptcy is at least one year from being completed. Others may be willing to take a risk. If a lender can be found, the loan should be paid back promptly. A second loan that is promptly repaid will go even further toward raising a credit rating.

Medical debts force many Tennessee residents into bankruptcy

Health care has become a common talking point for presidential candidates. Unfortunately, as the presidential campaigns are gaining steam, Tennessee's own health care crisis appears to be gaining momentum:

  • Access to health care is diminishing as many Tennessee hospitals are closing;
  • The lack of access to health care is compounded by rising health care costs;
  • The rise in medical debt is forcing many residents of the Volunteer State to consider filing a petition for personal bankruptcy.

The situation of a Knoxville family is demonstrative of the problems faced by people across the state. The couple's child was born with Prader-Willi Syndrome, a genetic disorder that produces a number of different symptoms. He remained in the hospital for three months after his birth, but his parents had no medical insurance for the first five weeks of care. Shortly after the child was brought home, his mother was diagnosed with cervical cancer. She required two surgeries. The couple felt that their only option was filing a petition for personal bankruptcy. Tennessee was the last state to pass the Katie Beckett waiver, a law that provides Medicaid eligibility for children whose parents' income is over the Tennessee limit of $2,113 per month.

Hospitals' collection actions against patients are on the rise

An increasing number of Tennessee residents are finding themselves caught between unpaid medical bills and the prospect of bankruptcy. Recent studies indicate that hospitals are going to court to collect unpaid medical bills in rapidly increasing numbers. The hospitals say they are suing only ex-patients who have the financial means to pay the bills, but researchers disagree.

One of the biggest hospital chains to resort to litigation is Ballad Health, a company with clinics and hospitals in Virginia and Tennessee. Ballad filed more than 6,700 collection actions against former patients in 2018. Since 2009, Ballad hospitals have filed 44,000 lawsuits seeking to collect unpaid fees and expenses. In most such cases, the hospitals prevailed because the patients either failed to appear for the hearing or were unrepresented by a lawyer.

What is a voidable preference in bankruptcy?

For most residents and small businesses in Eastern Tennessee, the bankruptcy process appears to deal solely with the debts owed by the petitioner. One class of debts, however, focuses on payments made to creditors before the bankruptcy proceeding begins. These debts are called "voidable preferences" for the very good reason that certain payments to creditors may be voided by the bankruptcy trustee.

Most debtors assume that they can pay their creditors in any order they choose. The bankruptcy system imposes a different rule: the bankruptcy debtor cannot treat similarly situated creditors in different ways. In other words, the debtor may not accord some creditors preferential treatment before and during the bankruptcy proceeding.

How a Chapter 13 bankruptcy can save the house

Perhaps the most common question asked by Tennessee residents who are contemplating filing a bankruptcy petition is whether they will lose their home in the bankruptcy proceeding. The question does not have a simple answer. The legal and financial effects of a bankruptcy depend upon the type of petition that is filed and the financial situation of the debtor.

The proceeding that offers the most certain opportunity to maintain possession and ownership of the family home is a Chapter 13 bankruptcy, often referred to as a wage earner's bankruptcy. In a Chapter 13 bankruptcy, the debtor provides a complete list of all debts, including home loans, auto loans, credit card debts, and all other obligations. Under the supervision of the United States bankruptcy trustee, the debtor then negotiates new terms for outstanding loans. The plan must specify a method for paying the loans or at least bringing them current within three to five years.

Understanding the means test in Tennessee

Most Tennessee residents who are considering filing a bankruptcy petition realize that they must decide between filing under Chapter 7 or Chapter 13. Prospective filers also understand that most, if not all, debts can be discharged in a Chapter 7 proceeding and that a Chapter 13 proceeding can only help the debtor renegotiate the terms of existing debts to allow more time to pay or, in some cases, to reduce the balance due. Most debtors prefer Chapter 7 for obvious reasons, but Chapter 7 does not provide relief for every bankruptcy filer. In order to be eligible for Chapter 7 and the total discharge of most obligations, a debtor must first pass what is called the "means test."

The means test is intended to prevent persons with significant annual incomes from discharging their debts in a Chapter 7 proceeding. In order to qualify for relief under Chapter 7, a debtor must demonstrate that his or her annual income is less than the Tennessee median for a household of comparable size. The median income is determined by averaging the debtor's monthly income over the last six calendar months. Once determined, a person's monthly income is multiplied by 12 to determine his or her annual median income. As of this writing, the Tennessee median income for a one-member household is $39,759, for a two-member household the median income is $48,053.00. For a 3-member household, the median income is $56,042.00. The annual limit increases by slightly less than 10% per household size before capping at $111,405.00 for a 10-member household.

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