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Cleveland TN Bankruptcy Law Blog

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.

Tennessee coal mining company seeks bankruptcy protection

The coal mining industry may seem to have only a tenuous connection with Bradley County, but a recent bankruptcy filing by a coal mining company that is headquartered in northeast Tennessee calls attention to the struggles of an industry that can affect the rest of the state. President Trump has blamed what he calls overly-strict regulations for the worsening financial condition of the coal industry, but in fact, the main problem is the competition from cheaper forms of energy, especially natural gas.

Mission Coal Company, a small coal miner with headquarters in Kingsport, Tennessee, recently announced that it had filed a petition under Chapter 11 of the Bankruptcy Code. Mission operates three mines in West Virginia and one in Alabama. With its Chapter 11 petition, Mission joins Westmoreland Coal, Peabody Energy, Arch Coal and Alpha Natural Resources as one of five coal mining companies to seek bankruptcy protection since 2015.

How can bankruptcy help the average wage earner?

Filing for bankruptcy is often touted as a miracle cure for financial troubles. Many people in Bradley County wonder how a complicated federal statute can repair years of overspending and poor financial decision making. The answer is two-fold: bankruptcy is not a miracle, but in the right circumstances, it can provide additional time to negotiate with creditors and perhaps reduce the amount of outstanding debt.

The most powerful weapon in the bankruptcy quiver is the automatic stay provided by Sec. 362 of the bankruptcy code. The automatic is a court order that is issued automatically by the court where the bankruptcy petition is filed. The stay prohibits any further attempts to collect debts that were due as of the date of filing of the petition.

Toys R Us planning a comeback

One of the most publicized bankruptcies of the summer was the decision by Toys R Us to end its business operations. Perhaps because so many people had beloved memories of visiting the stores with their parents, the business bankruptcy filing struck an emotional nerve in eastern Tennessee and other states. Now, the company's secured creditors have announced plans to attempt to resuscitate the brand.

Toys R Us was being crushed by $5 billion in debt and stiff competition from Amazon.com, Target and Walmart when its management decided to liquidate the company. The bankruptcy filing led to the closing of 800 stores and the loss of 30,000 jobs. The bankruptcy had an effect throughout the toy industry, including the decision by Mattel to trim 2,200 jobs because of lost sales to Toys R Us.

Selling the debtor's assets in bankruptcy

Companies who find themselves in a bankruptcy proceeding often decide to sell a portion of their assets to generate cash that can be used to pay creditors' claims. Some debtors even sell all or a substantial portion of their businesses while in bankruptcy. For buyers of such assets, the bankruptcy code provides a powerful incentive: such sales generally result in the transfer of assets free and clear of all liens and encumbrances. The starting point for such sales is Sec. 363 of the bankruptcy code.

Section 363 allows the trustee to sell assets of the debtor free and clear of any interest if the sale satisfies the conditions in Sec. 363(f), which include obtaining the consent of the debtor, showing that applicable non-bankruptcy law permits such sales free and clear of other interests, and the sale price exceeds the aggregate value of all liens on the property. The advantage of such sales for purchasers is the statutory guarantee that all liens and claims will be resolved in bankruptcy court and that the asset is transferred free and clear of such claims. Sec. 363 sales require notice to all creditors and approval by the court via motion.

Reviewing Tennessee's bankruptcy exemptions

Many people in eastern Tennessee who are contemplating bankruptcy are unaware of how the state's list of bankruptcy exemptions can help them. Under federal bankruptcy law, states are given the choice of requiring debtors to select either federal prescribed exemptions or accept the state's list. Tennessee has passed legislation requiring debtors to use the state's list of exemptions and precluding anyone from selecting exemptions from the federal list.

The most important bankruptcy exemption is the family homestead. The exemption may not exceed $5,000 for one person or $7,500 for a couple. For individual who are 62 or older, the exemption is $12,500 for one person and $25,000 if the two people are married and both are over 62. The real estate exemption applies only to the equity in the homestead and does not affect the balance on any loan that was used to purchase the property.

What is a voidable preference in bankruptcy?

Most entries in this blog are aimed at persons or businesses who are suffering from financial misfortune and are contemplating bankruptcy. This post is aimed at the creditors of persons and businesses on the verge of bankruptcy. When a businessman hears that one of his customers is going to file bankruptcy and leave him holding a significant unpaid debt, the first instinct is to demand payment in full. Unfortunately, the bankruptcy code includes a concept called "preference." The provision prevents debtors from giving preferential treatment to certain creditors by invalidating the payment of any pre-existing debt occurring 90 days before the bankruptcy petition filing.

Sec. 547 of the Bankruptcy Code provides a trustee with the power to set aside the transfer of interest of the debtor's property for the benefit of a creditor for an account owed by the debtor before the transfer is made. In order to be voidable, the transfer must be occur when a debtor is insolvent and on or within 90 days prior to the filing of the petition. The trustee has the power to make the creditor return the money or other consideration to the bankruptcy estate.

What are the differences between Chapter 7 and Chapter 13?

Residents of eastern Tennessee who are considering filing a bankruptcy petition have two basic options: Chapter 7 or Chapter 13. The differences between the two chapters are significant and should be understood by anyone who is close to making a final decision about whether and how to file for personal bankruptcy.

The essential difference between the two chapters is the difference in outcomes. Filers under Chapter 7 are usually looking to have all unpaid debts discharged, that is, unsecured debts such as credit card balances, bank loans and medical bills will be declared beyond the reach of creditors. Under Chapter 13, the debtor must submit a plan to the court showing how existing assets will be liquidated to pay current debts and how the unpaid portion of those claims will be paid off over time. Chapter 13 does not usually result in the discharge of a significant number of debts.

Tennessee-based health system seeks bankruptcy protection

Business mergers and acquisitions are often profitable if the merged entities have sufficient revenue to pay the expenses of the merger and handle any debt that was used to finance the merger. In 2016, Tennessee-based Curae Health bought three Mississippi hospitals from Franklin, a Tennessee.-based Community Health System. Now, Curae and its three hospitals are seeking bankruptcy protection because the merger failed to meet the financial projections that were used to justify the acquisition.

The president of the merged firm explained how pre-merger projections made the transaction seem prosperous. The projected EBITDA or earnings before interest, taxes, depreciation and amortization, appeared sufficient to pay the purchase price and retire corresponding debt. Curae executives also thought that its operating model would save the merged firm from 1-3 percent annually in operating expenses.

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