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How debtor-in possession financing can help a small business

Tennessee business owners who decide to file a petition for bankruptcy under Chapter 11 of the Bankruptcy Code intend to reform their company's finances and to emerge from bankruptcy slimmed-down and healthy. One of the most effective tools to achieve this intent is debtor-in-possession financing.

A debtor that wishes to continue in business after filing a Chapter 11 petition must obtain the permission of the court to retain possession of its assets and continue to operate. Often, the company requires additional liquidity so that it can retain supplier relationships, necessary leases and similar contracts. Debtor-in-possession financing was devised to meet the needs of a Chapter 11 debtor. The terms of the loan are worked out by the debtor early in the bankruptcy process in conjunction with its creditors and the court. The lender receives a first-priority lien on the assets of the business. If the business is successfully reorganized, the DIP lender receives a lien on the income of the business or, if the business is dissolved, on its assets.

What is a small business bankruptcy case?

When a small business in Rockland County is failing financially, the owner usually considers two types of bankruptcy - a dissolution under Chapter 7 of the Bankruptcy Code or reorganization under Chapter 11. Choosing the former usually means that the business will ultimately be dissolved, and the latter may cost many thousands of dollars in filing fees and attorney costs. A compromise is provided by provisions in the Bankruptcy Code directed at small business bankruptcies - the so-called "small business case."

A company is eligible for small business status if its total non-contingent debts total less than $2,566,050 and either the United States Trustee has not appointed a creditors' committee or the court finds that the existing creditors' committee is failing to maintain proper oversight of the debtor and its business. The main advantage of a small bankruptcy is the relative speed with which the case is conducted.

How bankruptcy provides prompt relief in a financial crisis

No one in Tennessee really plans to become bankrupt, but unexpected life events, such as a major illness or loss of a job, can create a financial crisis that may seem insurmountable. Fortunately for people who are facing such a crisis, the United States Bankruptcy Code provides relief.

The most sweeping protection is the so-called "automatic stay." The bankruptcy code states that the filing of a petition under either Chapter 7 or Chapter 13 operates as an automatic bar to all collection actions that were pending or could have been brought before the petition was filed. The debtor must provide a list of creditors and their addresses when the petition is filed. The clerk then uses this information to send a notice of the automatic stay to each and every creditor. All collection actions, including foreclosure, lawsuits to collect a debt and informal collection efforts must stop. No further action to collect a debt can occur until the bankruptcy proceeding is completed. The stay is not permanent, but it provides enough breathing room to permit most debtors to evaluate their situation, negotiate settlements with creditors and either sell assets or prepare a plan of reorganization.

What is the Chapter 7 "means test"?

When people in Eastern Tennessee consider bankruptcy, one of the first questions they ask is whether they should file under Chapter 7 or Chapter 13. Under Chapter 7, many of the family's debts will be discharged, that is, the debt will never have to be repaid in full. Under Chapter 13, the debtor files a plan under which all existing debts will be paid over time and the total balance due may be reduced. Many people naturally find Chapter 7's discharge procedure to be an attractive alternative, but not everyone is eligible to file under Chapter 7. In 2005, Congress, fearing that too many debtors with reasonable incomes would choose Chapter 7, imposed what is called a "means test." The means test is intended to ensure that persons with above-average incomes cannot use Chapter 7.

The means test involves a two-step analysis of the debtor's finances. In step one, the debtor must demonstrate that his monthly income for the past six months is less than the median income for his state of residence. The maximum median income allowable for a Chapter 7 filing varies by family size. Specific information regarding median incomes for every state is widely available on the internet. The calculation of income for the means test must include wages, salary, tips, gross income from a business, interest, dividends, royalties and other sources of income.

Toys 'R' Us calls it quits after reorganization efforts fail

Business bankruptcies generally do not evoke an emotional response from anyone other than the company's shareholders and employees. A rare exception to that rule is the reaction to the recent announcement by toy retailer Toys 'R' Us that it will close all of its 740 stores in the United States over the next few months. The announcement was greeted with sadness and a sense of loss by the millions of adults who remember spending their childhoods wandering through the aisles of their favorite Toys 'R' Us store. The causes of this large commercial bankruptcy provide powerful warning signs for other big box retailers.

Toys 'R' Us announced in September 2017 that it planned to file for protection from its creditors under Chapter 11 and attempt to reorganize its massive debt load. The chain then proceeded to have miserable sales during the normally profitable holiday shopping season. The disappointing sales were blamed on customer jitteriness over whether the chain would be able to fulfill orders and accept returns. The company admitted that it had difficulty matching prices with Amazon and other online retailers. Also, the increasing popularity of mobile devices reduced the demand for other kinds of toys.

Tennessee-based nursing home chain files Chapter 11 petition

A firm that files a Chapter 11 bankruptcy petition often engages in complex and lengthy negotiations with its creditors during the course of the bankruptcy process. In some bankruptcies, however, these kinds of negotiations often occur before the petition is filed. Such pre-petition negotiations are often undertaken to determine if a suitable plan of reorganization is possible. A Chapter 11 petition may be fruitless if one or more large creditors are not willing to renegotiate the terms of their agreements with the debtor. An example of a pre-petition negotiation was recently provided in connection with the business bankruptcy filing of a large nursing home operator based in Tennessee.

One of Tennessee's largest nursing home operators, 4 West Holdings, Inc., which does business as Orianna Health Systems, Inc., filed a petition for Chapter 11 reorganization last week, but it waited until it had worked out a restructuring of its lease with its landlord. Under the terms of the agreement, Orianna agreed to transfer 23 of its facilities to a new operator and to sell 19 other facilities to a new operator.

How the automatic stay works in a personal bankruptcy

For many people in southwestern Tennessee, bankruptcy seems like a black hole. After a person takes the plunge, what happens to the family home, the car, furniture and other personal possessions? The answers to these questions may vary, depending upon a person's particular financial situation. One beneficial feature of the bankruptcy code is, however, common to all bankruptcy proceedings: the automatic stay.

When a person files a petition for relief under either Chapter 7 or Chapter 13, the filing must be accompanied by a complete list of creditors. The bankruptcy court then uses this list to give written notice to all creditors that collection proceedings against the debtor or the debtor's property must be immediately stopped. The notice effectively halts all collection efforts, including both informal methods and court proceedings such as foreclosure of a mortgage. The giving of the notice is automatic - the debtor need not do anything. The notice is really an order of the court called a "stay" in legal parlance, hence, the term "automatic stay."

What is involuntary bankruptcy?

Creditors of a failing business in Tennessee often regard the filing of a bankruptcy petition by a creditor with dread because they fear that their claims will be dismissed by the bankruptcy court. Why, then, would a creditor want to force a debtor into business bankruptcy by filing what is known as an "involuntary petition"?

The answer is self-protection. Some companies that are in poor financial shape resist the thought of filing a Chapter 7 or Chapter 11 petition because they nurse the hope that their financial situation will somehow improve. Creditors often have a more realistic view of a debtor's situation and worry that continued operations will merely reduce the value of assets that could be used to pay claims. If three or more creditors of the same debtor reach this conclusion, they may want to file a petition under either Chapter 7 or Chapter 11 to force the debtor into bankruptcy court where the debtor's business will be subject to supervision by both the bankruptcy trustee and the court.

Iconic guitar manufacturer, Gibson faces bankruptcy

One of the most widely recognized names in the music industry is Gibson -- the maker of both acoustic and electric guitars. The parent company, Gibson Brands, Inc., has been based in Nashville since 1974, when it moved to begin manufacturing its most famous product, the Les Paul electric guitar. Now, the famous company is facing the possibility of seeking relief from mounting debt in Chapter 11 bankruptcy.

The company was founded in 1902. In 1952, the company entered a business alliance with pop guitarist, Les Paul and began to manufacture guitars using his name. The company went through several adverse business cycles until it was purchased in 1986 by its current owner, Henry Juskeiwicz. Juskeiwicz restored the company's reputation and profitability to the point where the company now grosses about $1 billion annually.

Mortgage modification firm settles charges of lending abuse

Many residents of Tennessee suffer from financial difficulties have attempted to modify their home mortgages to forestall both foreclosure and Chapter 7 bankruptcy. Unfortunately, some firms offering mortgage modification services attempted to take advantage of persons who see mortgage modification as a pathway to financial health. A recent settlement between Massachusetts and a large non-bank lender shows some of the abuses that borrowers may face.

According to a statement released by the Massachusetts Attorney General, the firm, formerly named Northstar, and now known as Mr. Cooper, has agreed to settle the state's claims against it by submitting to various penalties. Nationstar is alleged to have violated the Massachusetts law intended to prevent lenders from using certain deceptive practices.

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