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Cleveland TN Bankruptcy Law Blog

Company's restructuring leads to restaurant closing

Chapter 11 bankruptcy protection provides businesses with an opportunity to stop, restructure and repair problems that are threatening the company's financial health. It can mean the difference between saving the company and having to shutter the doors.

That doesn't mean it's easy, however. The story of a Tennessee restaurant helps illustrate one of the painful aspects of Chapter 11.

What is a deed in lieu of foreclosure and what are its benefits?

Residents of southeastern Tennessee who face financial difficulty are worried about losing their homes. In some cases, unfortunately, the loss in a foreclosure proceeding is inevitable. If a lender completes a foreclosure proceeding and takes possession, the borrower's credit rating will be severely damaged. And, if the property does not provide enough cash to pay the balance on the loan, the borrower may be hit with a deficiency judgment. That is a court finding that the borrower owes whatever amount is required to pay the loan in full. If foreclosure appears to be inevitable, a borrower may consider a deed in lieu of foreclosure.

A deed in lieu of foreclosure is roughly analogous to a voluntary foreclosure. In its simplest form, a deed in lieu of foreclosure is a voluntary transfer of title to the lender, instead of a complete foreclosure proceeding. The principal advantage to both parties of a deed in lieu of foreclosure is avoiding both the delay and cost of a foreclosure proceeding. Moreover, if a bankruptcy proceeding has commenced, a deed in lieu of foreclosure, in some cases, may help the lender avoid the automatic stay.

Understanding mortgage foreclosures

Perhaps, no single word is as terrifying to a Tennessee homeowner as "foreclosure." Anyone who is behind on mortgage payments fears that the lender may commence a foreclosure proceeding at any time. And, the family home may be lost, which means that a bankruptcy will ensue. Fortunately, the reality of the foreclosure process is less harsh than most people imagine.

A mortgage loan has two parts: the promissory note, which is the promise to repay the loan with interest, and the mortgage, a legal document that gives the lender the right or lien to reclaim the property if the borrower fails to make timely payments. The mortgage spells out the procedures that the lender must follow to reclaim the property.

Important limits on the reach of the automatic stay in Tennessee

This blog has frequently mentioned the importance of the automatic stay under Section 362 of the United States Bankruptcy Code as a method of halting collection efforts by the debtor's creditors. The automatic stay goes into effect immediately upon the filing of the bankruptcy petition, and after the petition is filed, no creditor can pursue a collection action or request payment of an existing debt from the debtor. In spite of this enormous benefit, the automatic stay has important limitations that should be understood by anyone who wants to use it as a shield against creditor's claims.

The automatic stay does not affect the commencement or continuation of a criminal action against the debtor. The following civil actions are exempt from the effect of the automatic stay: to determine paternity, establish or modify an order for domestic support obligations, establish child custody or visitation and regarding domestic violence. Divorce proceeding are also exempt from the automatic stay, except for that portion of the proceeding concerned with determining the division of property that belongs to the bankrupt estate.

Bankruptcy and the small business

Many owners of small businesses in Bradley County do not make a sharp distinction between their business finances and personal finances. These owners treat their businesses as if the business were merely another category of personal finances. Unfortunately, for these businesses and their owners, the lack of a clear distinction may create unexpected hardships, if the business falls on hard times -- and especially, if bankruptcy appears to be the only remedy for the business.

Small businesses in Tennessee are organized in four types: sole proprietorship, general partnership, limited liability company (LLC) and corporation. Sole proprietorships and general partnerships are generally treated as though the business and the individual owner are the same entity. The owner is personally liable for the debts of the business.

Practical tips for avoiding foreclosure

Many people in Tennessee had the unpleasant experience of watching increasing debts threaten their financial well-being. One of the most pressing questions is whether financial difficulties will result in foreclosure and the loss of the family home. This blog has discussed how the automatic stay that is issued when a person files a bankruptcy petition halts all foreclosure proceedings until the bankruptcy process is completed. But, the law and differing lending practices provide a number of less dramatic ways to avoid foreclosure.

As the threat of foreclosure grows, a homeowner should take the following steps. The first step is to collect and read all documents concerning the loan that was used to buy the home. These documents usually include the deed, the promissory note that is the borrower's agreement to repay the loan and the mortgage, the document that gives the lender the right to seize the house, if payments on the note fall behind schedule.

Understanding the benefits and limits of the automatic stay

One of the most powerful provisions of the United States Bankruptcy Code is the automatic stay -- the provision that prevents creditors from attempting to collect a debt from the debtor. For anyone in Tennessee who files a bankruptcy petition, the automatic stay will bring most collection actions to an immediate stop. However, not every action against the debtor will be stopped. As such, for anyone contemplating bankruptcy, the power and limits of the automatic stay should be completely understood.

Many people understand that the automatic stay can halt a judicial proceeding, but a common misperception is that the stay applies only to lawsuits. The actual reach of the stay is much broader.

Reorganize debt and get to a better financial situation

When most Tennessee residents think about filing for bankruptcy, they are probably thinking about Chapter 7 bankruptcy, which is commonly known as "liquidation" bankruptcy. In a Chapter 7 bankruptcy, the bankruptcy filer's assets are sold off, with some exemptions, and the proceeds are used to pay off outstanding debt. However, there is another option for residents to consider: Chapter 13 bankruptcy.

Chapter 13 bankruptcy is commonly known as "reorganization" bankruptcy. In a Chapter 13 bankruptcy, the bankruptcy filer gets to keep assets, and instead sets up a repayment plan with the bankruptcy court to address outstanding debt. In this fashion, the filer can pay back most of the debt owed to creditors over the course of a three to five year plan.

Valuing a business in a Chapter 11 bankruptcy

When a Tennessee business faces the possibility of filing a bankruptcy petition, one of the first questions that is asked is whether to seek reorganization under Chapter 11 or dissolution under Chapter 7. If the business chooses, the former, its executives and advisors will be required to answer a number of questions about the value of the company and its assets. Understanding these questions and how to answer them is a necessary prerequisite to choosing between Chapter 11 and Chapter 7 business bankruptcy.

Under Chapter 11, the company has the opportunity to prepare a reorganization plan that includes extra time for paying existing obligations and the possible reduction of some debts. The bankruptcy code requires that a plan of reorganization establish a "reorganization value" that will provide outcomes for shareholders and creditors that are better than a Chapter 7 dissolution. Several methods are available for making this determination.

Denial of a discharge in a Chapter 7 bankruptcy proceeding

Most people in Tennessee who seek to discharge their debts in a Chapter 7 bankruptcy proceeding assume that their debts will be wiped out at the end of the process. This expectation, while understandable, does not represent the law that governs Chapter 7 discharges. Creditors have the right to object to a discharge of certain debts on any of several grounds spelled out in the Bankruptcy Code.

The applicable code section begins by stating that "The court shall grant the debtor a discharge" and then adds the important qualifier "unless" followed by the many exceptions to that rule. The first enumerated exception is a finding that the debtor, with intent to delay or defraud a creditor or officer of the estate, has allowed property to be transferred, destroyed or concealed within one year prior to filing of the petition. The same exception applies to debtors who have destroyed or concealed information concerning the debtor's financial condition. In essence, this group of exceptions to discharge concerns fraudulent acts by the debtor or the debtor's agents.

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