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Cleveland TN Bankruptcy Law Blog

How does bankruptcy affect a personal credit score?

Most large lenders, such as banks, credit unions and similar organizations, use a number called a "credit score" to decide whether to loan money to a particular person. A high credit score makes it easy to borrow money, whereas a low credit score makes borrowing burdensome and often impossible. People in eastern Tennessee often wonder how filing a bankruptcy petition will affect a credit score.

Filing a bankruptcy petition can have a devastating effect on a person's credit score. The exact effect will depend upon each person's individual financial situation, but the mere act of filing a Chapter 11 petition can cause a 200 point drop in a credit score of 700 (which is an excellent rating) or between 130 and 150 points in a credit score under 680. A Chapter 7 filing will diminish a person's credit score for about 10 years, whereas a Chapter 11 filing will affect a credit score for about five years.

Understanding medical bankruptcy

Bankruptcy holds many mysteries for people who have never experienced the process. One of the most common myths among residents of Bradley County is so-called "medical bankruptcy." All bankruptcies are governed by the United States Bankruptcy Code, and many people may be surprised to learn that there is no such thing as a "medical bankruptcy." Nevertheless, the bankruptcy code can help people who are struggling with heavy medical bills.

The degree of assistance in dealing with medical bills (and all other unsecured indebtedness) offered by a bankruptcy filing depends upon whether the debtor can qualify for Chapter 7 or must file under Chapter 13. A Chapter 7 bankruptcy can eliminate many unsecured debts, including medical bills, but the debtor must pass a "means" test, that is, no one can file a petition for discharge of debts under Chapter 7 unless their monthly income is lower than the median monthly income for residents of Tennessee. If a person qualifies for Chapter 7, all unsecured debts owed by that person, including medical debts, will be discharged at the conclusion of the proceeding.

Getting a bankruptcy proceeding started on the right foot

For most people in Bradley County, the decision to file a bankruptcy petition can be inhumanly stressful. There are, however, ways to minimize the anxiety that results from filing a bankruptcy petition. This post will summarize the important initial steps that are essential to a proper beginning to a bankruptcy proceeding.

The 2005 Bankruptcy Act specified that all individuals who intend to file bankruptcy on or after October 17, 2005 must undergo credit counseling within 6 months prior to filing the petition and to complete a financial management instructional course after filing the petition. The next step is to determine whether the petition will be filed under Chapter 7 or under Chapter 13.

What is an agricultural bankruptcy?

Many farmers in Bradley County and in Eastern Tennessee have shied away from filing a petition in bankruptcy. Some have found the liquidation provisions of Chapter 7 too severe for their situation; others have rejected Chapter 11 as too complex and too expensive. Congress acted to eliminate this dilemma in 1986 by adding Chapter 12 to the Bankruptcy Code. This chapter is intended to allow family farmers to reorganize their debts and continue farming without facing dissolution under Chapter 7 or the expense of Chapter 11.

To take advantage of Chapter 12, a person must be "engaged in a farming operation. The farm business must be owned and controlled by the debtor's immediate family. The total amount of debt owed by the farmer cannot exceed $4,153,150, and at least 50% of those debts must be related to the farming operation. More than 50% of the debtor's gross income for the preceding tax year must have come from farming. If the farming business has been incorporated, more than one-half of its outstanding stock must be owned by one family. The family must conduct the business of the farm, and more than 80% of the corporation's assets must be related to farming. The stock of the farming business cannot be publicly traded.

What information is required in a Chapter 7 bankruptcy petition?

When people in Bradley County consider filing a bankruptcy petition, they are usually more concerned with the outcome than with properly commencing the proceeding. Sometimes, gathering the information that must be provided with the petition can seem an overwhelming task. This post will provide a bird's eye view of the types of information that must be submitted to the bankruptcy court in order to start a Chapter 7 proceeding.

The debtor must acquire a set of the official forms specified by the Bankruptcy Court. The court will not provide these forms, but they are available online and in most stationery stores. The bankruptcy forms are intended to ensure that the debtor provides the types of information that will illuminate the debtor's financial situation and expectation for future income.

Comparing Chapter 7 bankruptcy with Chapter 13 bankruptcy

Many individuals in eastern Tennessee who are wondering about filing a bankruptcy petition are often puzzled by the differences between a Chapter 7 and a Chapter13 proceeding. Depending upon a person's individual financial situation, the differences can be subtle and complex, but understanding certain major features of each type of proceeding can help make a sensible decision.

A Chapter 7 bankruptcy is intended to use the debtor's existing assets to pay off debts. In order to use Chapter 7, the debtor must show that his or her income is lower than the median income for the state of Tennessee. If the debtor's income is more than the state limit, the debtor will not be allowed to seek a Chapter 7 discharge.

Understanding involuntary bankruptcy

The great majority of bankruptcy petitions filed in Bradley County and in Tennessee at large are filed by debtors seeking to have all or a portion of their debt load erased by the bankruptcy court. The rare exception is a petition filed against a person or an entity by three or more creditors asking to have the defendant declared bankrupt and to have the court take charge of the debtor's assets. Such petitions are called involuntary bankruptcies, and they are used by creditors to freeze the assets of an entity who may be mismanaging or wasting its assets.

Involuntary bankruptcies are governed by Sec. 303 of the Bankruptcy Code. All involuntary proceedings must be commenced under either Chapter 7 seeking dissolution of the entity or under Chapter 11 seeking to impose a plan of reorganization. An involuntary bankruptcy must be commenced by at least three creditors, each of which holds a claim against the debtor. Such claims must not be contingent or the subject of a "bona fide" dispute. The combined value of the claims must exceed $10,000.

Understanding reaffirmation agreements

When residents of Bradley County contemplate filing a bankruptcy petition, one of their most bothersome concerns is whether they can keep their house or automobile. The bankruptcy process provides several alternatives for keeping essential assets, but one of the most important techniques is executing a reaffirmation agreements in which the debtor agrees to keep making payments on a loan secured by a lien or mortgage.

In a Chapter 7 proceeding, all debts will ordinarily be discharged unless the debtor takes action to keep the underlying security agreement in force. If the debtor takes no action, the creditor can enforce whatever rights are specified in the security agreement to repossess the asset in question. For example, a bank that extended a loan to purchase an automobile may repossess the car if the debtor does not reaffirm the security agreement with the bank.

Gibson Guitars plans to exit bankruptcy, resume production

Many people were saddened by the announcement of Sears' bankruptcy, but a smaller group experienced even greater sadness when iconic guitar maker Gibson announced its bankruptcy in May of this year. Based in Nashville, Gibson manufactured many types of guitars, including both electric and acoustic. But its most famous product was the electric "Les Paul" model. The recent announcement that Gibson was emerging from bankruptcy gladden the hearts of many guitar aficionados.

Gibson experienced financial difficulties when it attempted to expand beyond the manufacture of musical instruments. The company borrowed money to fund the purchase of electronics manufacturers in an effort to expand its revenues, but sales were slow while debt continued to increase. Finally, a heavy turnover in the company's financial executives prevented any new business plan from being effective.

The use and abuse of executory contracts in bankruptcy

Bankruptcy can be a difficult journey for a financially troubled business, but the risks for customers of the debtor can also be both significant and unexpected. One of the greatest hazards faced by customers of companies in commercial bankruptcy is the chance of having a once stable and ongoing business relationship turned on its head if the trustee should decide that one or more of the debtor's contracts is not necessary to the health or recovery of the business. Such contracts are referred to as "executory contracts." Any business that has a business relationship with a bankrupt or nearly bankrupt firm should be aware of what may happen to such contracts.

Without providing an explicit definition of an executory contract, the bankruptcy code gives the trustee the power to either reject or assume an executory contract. Generally speaking, an executory contract is a contract that has been partially performed by the parties but one or both parties is under a continuing duty to perform.

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