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Chattanooga Bankruptcy Law Blog

Understanding voidable preferences in bankruptcy

When a small business in Tennessee is teetering on the edge of bankruptcy, creditors often attempt to persuade the business to pay their claims before filing a bankruptcy petition. While such a transaction may appear to benefit both the debtor and creditor, payments to creditors can often create what are known as "voidable preferences" or "preferential transfer." Such payments are often set aside by the debtor or the bankruptcy trustee, and the money paid to the creditor is returned to the bankruptcy estate.

Six factual elements must be proved by the debtor or the trustee in order to set aside a preferential transfer:

  • The existence of a transfer money or other asset to the creditor;
  • The transfer is made for the benefit of the creditor;
  • The transfer is made to pay a pre-existing debt;
  • The transferor must be insolvent at the time of the transfer;
  • The transfer was made less than 90 days prior to the filing of the bankruptcy petition; and
  • The transfer enabled the creditor to receive more value than if the transfer had been made in a Chapter 7 proceeding.

The basics of Chapter 7 and Chapter 13 bankruptcies

The United States Bankruptcy Code gives individual debtors two basic choices for bankruptcy: Chapter 7 and Chapter 13. The differences between both types of bankruptcy proceedings may be helpful in deciding which proceeding to use.

In a Chapter 7 bankruptcy proceeding, the debtor turns over all non-exempt property to the bankruptcy trustee, who then sells the assets and uses the proceeds to pay creditors. Any debts that have not been satisfied are then canceled, and the debtor has no further liability. In a Chapter 7 proceeding, the debtor may lose an automobile or house, or both. Not everyone is able to use Chapter 7. Tennessee has imposed a "means test" on potential Chapter 7 filers. Anyone whose annual income exceeds the median income in the state cannot file a Chapter 7 petition.

An introduction to involuntary bankruptcy proceedings

Most bankruptcy proceedings in the Chattanooga area are started by a person or corporation who is struggling with a heavy debt load and an insufficient cash flow. On occasion, a bankruptcy proceeding is started by one or more creditors of the debtor who fear they will not be paid because the debtor will squander its assets instead of paying its debts. Such proceedings are called involuntary bankruptcies, and they operate under a special section of the Bankruptcy Code.

The requirements for commencing an involuntary proceeding are very strict. Deviation from these requirements can subject the violator to significant penalties. An involuntary case can be started under either Chapter 7 or Chapter 11 against any person, except a farmer or a non-profit corporation, that may be a debtor under either Chapter 7 or Chapter 11. An involuntary case can be started by three or more entities, each of which holds a claim against the debtor that is not (a) contingent as to liability or (b) subject to a bona fide dispute as to liability. The total amount of claims held by the filers of the involuntary petition must exceed by $10,000 the value of any lien against property of the debtor. After the initial petition is filed, other creditors can ask to join the proceeding as a creditor.

How to tell a minor business hiccup from a major financial crisis

When you first had a dream to become a Tennessee business owner, you might have spent hours upon hours thinking of your future and hoping to see that dream unfold someday. Perhaps, during the start-up phase, you even thought of quitting a few times, as is common for many small business entrepreneurs. You stuck it out and finally arrived at the day when you hung the proverbial shingle and opened your business to the public.

Whether that was less than five years ago or decades have passed since then, you've likely encountered numerous challenges along the road to success. When such challenges are financial, they can cause panic. That's why it's good to know how to recognize par-for-the-course issues from a serious crisis that prompts a need for immediate debt relief.

How bankruptcy can impact credit card debts

Many people in Chattanooga and Eastern Tennessee who wonder about filing a petition for bankruptcy are struggling under a mountain of credit card debt. They may have heard that bankruptcy offers protection from credit card companies that are trying to collect on these delinquent accounts, but they don't understand the process and may be skeptical about whether a bankruptcy petition will offer any protection. Any question about bankruptcy can be answered only with reference to the specific financial situation of any given person. But, a bankruptcy petition will bring all collection actions to a stop until the bankruptcy proceeding is complete. This is known as the "automatic stay."

Bankruptcy is intended to give financial relief to people who cannot manage their debts. The automatic stay is instrumental to achieving this end. When a petition for bankruptcy is filed under Chapter 7, Chapter 11 or Chapter 13, the court where the petition is filed issues an order to all creditors identified by the person who filed the petition directing that all collection proceedings stop immediately.

More baby boomers are struggling with debt

Financial troubles can hit people of any age. Some of those in Tennessee who are struggling with debts they cannot pay are young adults or are middle aged. However, one study has found that older adults are also struggling with debt, leading some to file for bankruptcy.

A study called the Consumer Bankruptcy Project collected data on who was filing for bankruptcy since the 1990s. The results of the study showed that one in seven individuals who declared bankruptcy in the United States are age 65 and up. Specifically, in 1991, of those individuals who filed for bankruptcy only 2% of these bankruptcy filers were 65-years-old or older. However, by 2016 the number of bankruptcy filers who were 65-years-old or older constituted 12% of those who filed for bankruptcy. During that same time period, the percentage of elderly people in the U.S. only rose from 17% to 19.3%. A U.S. Federal Reserve survey showed that in 1989 one-fifth of those in the U.S. age 75 or older carried debt. However, by 2016 that number jumped to 50%.

Can Chapter 7 help if you have auto loan delinquencies?

Whether you are buying your first car or upgrading to a new model, it may come as a surprise that these days a new car can cost, on average, over $37,000. With car prices continually increasing, many people in Tennessee are taking out auto loans to pay for their new vehicles. In fact, in total $1.2 trillion is now owed on auto loans in the U.S.

This is troubling as more subprime loans are be being granted. These subprime loans are given to those whose credit scores are below 620. Subprime loans often are paid back for a longer time period, some lasting as many as seven years. This is problematic as it means that subprime debtors ultimately may not be able to afford to pay back what they owe on the auto loan. According to the U.S. Federal Reserve Board, the number of outstanding auto loan payments is going up, a problem that is only compounded by the fact that there is a larger group of debtors that are at a high risk of becoming delinquent on their loan.

Even young adults are struggling under medical debt

It is a belief among some in Tennessee that many of those who file for bankruptcy due to medical debt are older people. After all, younger people do not always face the medical catastrophes, such as heart attacks or cancer, that older people may experience. However, a recent study published in the journal, Health Affairs, reported that the opposite may be true.

According to the study, which examined 4 million credit records, one in six people in the United States has delinquent medical bills that show up on their credit report. This medical debt is not always high -- 53% of those studied had medical debt that was under $600. However, when you are living paycheck-to-paycheck, even hundreds to dollars is enough to catapult you into a financial crisis.

Facing the threat of repossession? Here is what you need to know

There are many consequences to owing a significant amount of debt. If you are in a difficult financial situation and behind on your payments, one of the things you may face is the threat of repossession. At this point, you may want to know what you are up against and how you can take steps to reclaim your financial future.

Repossession is the process of taking back property bought on credit if you are behind on making payments. Vehicular repossession is a common form of repossession, and it may come as a surprise to you that a creditor can simply come and take your car out of your driveway. No matter how much debt you have, you still have rights, and you have the right to pursue a better financial future.

How can bankruptcy exemptions help those filing for Chapter 13?

When people in Tennessee get to the point where they are considering filing for bankruptcy, their first thought may be to file for Chapter 7 "liquidation" bankruptcy. In a Chapter 7 bankruptcy, a debtor's assets are sold, and the proceeds are used to pay back their creditors. However, sometimes a person's income is too high to qualify for Chapter 7 bankruptcy. When that happens, Chapter 13 bankruptcy may be an option. When filing for Chapter 13, the debtor's assets will be reorganized, and a repayment plan will be developed to pay the debtor's liabilities over a period of three to five years.

However, just as in Chapter 7, bankruptcy exemptions can be an important part of a Chapter 13 filing. The Chapter 13 repayment plan is based on the income and assets the debtor has. So, if a person's total assets equal "X," then "X" is the minimum amount that must be repaid. However, certain assets can be exempt from this total.

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Mark T. Young & Associates
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Hixson, TN 37343

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