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Cleveland TN Bankruptcy Law Blog

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.

How bankruptcy can give an individual a fresh financial start

Personal bankruptcy often carries a heavy stigma among people in Bradley County. Bankruptcy is often viewed as a form of cheating, that is, people use it to escape their legal obligations and for no other reasons. This view is not correct. Financial problems can arise from many causes that are beyond the control of an individual. A serious illness or injury might exhaust financial resources. Likewise, the loss of a job can have a ruinous impact on a person's ability to manage debt. The federal bankruptcy law is intended to alleviate these problems and help individuals regain their financial health.

The first step to financial relief is the so-called "automatic stay," a court order that is issued automatically every time a bankruptcy petition is filed. The stay stops a person's creditors from taking any steps to collect on a debt owed by the petitioner. The stay will be lifted upon completion of the bankruptcy, but by preserving the status quo, it gives the debtor important breathing space.

The pros and cons of an in-store credit card

Many shoppers in Bradley County have been offered a credit card at the check-out counter of a discount store, super market or other retailer. The offer seems almost too good to be true - no credit check, instant credit of $500 or more, and low interest rates. Like most things that appear to be too good to be true, an in-store credit card may also be too good to be true. Before accepting another dollop of credit card debt, a person should carefully consider both the advantages and disadvantages of an in-store credit card.

The first point to consider is the fact that the merchant or professional is not issuing the credit. The credit most likely comes from a third-party bank or finance company. If problems arise in using the card, a person might wind up dealing with a stranger hundreds or thousands of miles away. If the offered card has a low limit, the user could exhaust the credit limit and thereby raise the utilization rate, which translates into a lower credit rating. Interest rates on in-store credit cards can be significantly higher than bank-issued credit cards, almost 2.5 percent higher than the national average.

Considerations in choosing bankruptcy

No one in Tennessee plans to end up bankrupt, but unexpected life events, such as illness, divorce or loss of a job, may force individuals to seek the protection of federal bankruptcy laws. While bankruptcy is often perceived to create a social stigma, it may be a better choice than persevering under a heavy debt load.

Consumers have two main choices in filing for bankruptcy. Under Chapter 7, the debtor's property will be seized by the trustee and sold to pay bills. Unpaid debts are discharged. Under Chapter 13, the debtor relies on anticipated future income to develop a plan of reorganization, under which creditors are paid over time.

Gibson seeks bankruptcy protection using pre-negotiated plan

After months of negotiations with creditors, Gibson Brands, Inc., the Nashville-based maker of legendary Gibson guitars, has filed a petition under Chapter 11 of the Bankruptcy Code. The filing was accompanied by a plan of reorganization that had already been negotiated with the company's creditors. The plan offers lessons for both large and small companies considering a business bankruptcy.

The plan essentially gives control of the company to a committee of bondholders led by private-equity firm Kohlberg Kravis & Roberts. The company has agreed to sell off its non-core subsidiaries, such as Gibson Innovations, Ltd., located in Hong Kong. According to company executives, the Chapter 11 filing was forced upon the company by a series of debt payments that start coming due this summer. The company's total debt obligation is close to $500 million.

Car dealer bankruptcy clouded by allegations of fraud

The bankruptcy process depends in many ways on cooperation between the debtor and its creditors to resolve issues about asset value, existing debts and the history of the business before the petition is filed. When the parties cannot reach agreement, or when the disagreements become particularly intense, the bankruptcy court often takes a more active role in monitoring the parties' behavior. The commercial bankruptcy of Auto Masters, a group of used car lots in and around Nashville, has recently taken such a turn.

Believing that persons with motives antithetical to the interests of the company, Auto Owners' CEO recently dispatched armed security guards from another enterprise he owned to the main Auto Owners' lot in Nashville. The move prompted the convening of a special court session in front of the bankruptcy judge. The judge severely criticized the Auto Owners' CEO for taking action intended to intimidate parties that he believed were acting contrary to his interests. The judge found the owner in contempt of court and ordered him to turn over access to the main Auto Owners lot on pain of otherwise paying a daily fine of $10,000.

Understanding wage garnishment in Tennessee

Wage garnishment is one of the most misunderstood collection practices in Tennessee. The procedure is commonly used by parties who have obtained a court judgment for money to collect the amount due from the person who owes the money, i.e., the judgment debtor. Filing a bankruptcy petition is usually the most effective way to stop garnishment.

In order to commence a garnishment proceeding, the creditor must obtain a court judgment ruling that the debtor owes money to the creditor. The creditor must give notice of the court proceeding to the debtor, and the debtor has an opportunity to defend against the claim. If - and only if - a final judgment is rendered in favor of the creditor may that party commence a wage garnishment.

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.

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