JOHNSON CITY Bankruptcy Attorney

Declaring bankruptcy wipes out many debts, but not all.

What Debts are Usually Covered by Bankruptcy?

Bankruptcy can clear most unsecured debts, including:

• Credit card bills
• Medical bills
• Overdue utility payments

Bankruptcy can also clear many secured debts, but it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. For Chapter 7, you will have to give up any non-exempt items you put up for collateral. For Chapter 13, they will become part of your repayment plan.

What Debts Are Not Covered by Bankruptcy?

• Child support
• Alimony obligations
• Those related to personal injury or death in a drunk driving case
• Any debts not listed on your bankruptcy papers

No type of bankruptcy covers these debts. If you file for Chapter 7, they remain outstanding. Under Chapter 13, you pay these debts along with your other debts.

What Debts May Be Covered?

Bankruptcy rarely covers student loan debt. However, it may be in some cases with proof of undue hardship.

Tax debt is also rarely covered, but bankruptcy may cover certain old unpaid taxes.

How bankruptcy affects business depends upon the type of bankruptcy filed.

Chapter 11

Businesses classified as corporations, partnerships, or LLCs can file Chapter 11 bankruptcy. Chapter 11 allows for debt restructuring, while the business stays open. As in Chapter 7 and Chapter 13, an automatic stay activates as soon as your bankruptcy period begins. In an automatic stay, creditors cannot try to collect money or other assets from you.

During this period, you work with your lawyer to restructure your debts and develop a plan to get your business back on track. This plan must be approved by some of your creditors and a bankruptcy court to go forward. You will be able to repay your debts over several years.

Chapter 7

Filing Chapter 7 bankruptcy discharges all of your business’s debts by liquidating your assets. The entire process can be completed quickly, often in several months. Chapter 7 allows for the discharge of most debts, excluding government taxes and fines.

Chapter 13

Only individuals can file for Chapter 13 bankruptcy. Thus, although businesses cannot file, you can file Chapter 13 as the sole proprietor of your business.

Various considerations get factored into who should file bankruptcy. Filing bankruptcy may be the right choice for you if you are overwhelmed by debt. Regardless of what type of bankruptcy you file, as soon as the process begins, you are granted an automatic stay. A stay is an injunction that prevents creditors from collecting any debts for an allotted time. An automatic stay halts the process of, for example, foreclosing on a home or repossessing a vehicle.

A Chapter 7 bankruptcy will discharge most of your debts. Filing Chapter 7 is appropriate for those who make less than the median household income in Tennessee and whose assets would not be at risk. In this situation, your non-exempt property is sold to pay off creditors.

Chapter 13 bankruptcy allows you to create a plan to repay your debts. If you have non-exempt property used as collateral in secured loans, you can restructure your finances to pay off any relevant debts over the next three to five years. Chapter 11 functions in a similar way, but is exclusively for businesses.

Filing for bankruptcy can provide a fresh start for those bogged down with debt, either by restructuring finances or discharging debts entirely.

There are several types of bankruptcy. Most individuals, married couples, and small businesses choose to file under Chapter 7 or Chapter 13.

What are the Differences Between Chapter 7 and Chapter 13?

The primary difference between these two types is that Chapter 7 bankruptcy allows an entity to fully discharge its debts in a short period. A Chapter 13 bankruptcy involves reorganizing debts and creating a plan to repay those debts over an allotted time. After that time, Chapter 13 eliminates most of the remaining debts.

Chapter 7 bankruptcy is typically filed by those with very limited income and unsecured debts, the most common of which is medical bills. Chapter 13 bankruptcy is most often filed by higher income bracket individuals and those with more assets, such as a car or a home. The motivation for filing Chapter 13 bankruptcy is often preventing assets from being repossessed or home foreclosure due to outstanding debts.

What Other Types of Bankruptcy Are There?

Two other types of bankruptcy are Chapter 11 and Chapter 12.

Chapter 11 primarily applies to larger companies and corporations, but sometimes it is the right choice for small businesses as well. Chapter 12 applies to those who are considered family farmers.

Bankruptcy occurs when an individual, business, or other entity declares the inability to repay its debts. If you file for bankruptcy, that means that debt collectors must pause attempting to collect debts from you. Bankruptcy often allows you to erase most, if not all, of your debts.

There are two types of debts, unsecured and secured. Some examples of unsecured debts are credit card bills, medical bills, or taxes. Secured debts can include car loans or mortgages, which use the purchased item as collateral. In many cases, filing for bankruptcy can keep this collateral protected and prevent foreclosure of your home or repossession of other assets.

Bankruptcy is governed by federal legislation under the Bankruptcy Code, which falls under the greater United States Code. Both federal law and local law inform the bankruptcy procedure. Federal bankruptcy judges, appointed by the United States court of appeals, preside over court proceedings in these cases. In court, the judge and a court trustee, review your finances to determine whether or not to discharge the debts at hand.

Each state has one or more bankruptcy courts. Tennessee has six bankruptcy courts throughout the state.

Filing for bankruptcy can be a daunting process, and working with a firm with expertise in the field can provide you with necessary guidance.

A Chapter 7 bankruptcy process allows individuals or small businesses to discharge or eliminate all unsecured debts. For this reason, Chapter 7 bankruptcy is often called “straight bankruptcy.” The most common unsecured debts for which people file bankruptcy in Tennessee are medical bills and credit card bills.

A Chapter 7 bankruptcy requires liquidating the assets of the person or small business filing bankruptcy. This liquidation means that if a debtor exceeds the allowed bankruptcy exemption, they must use your property to pay your creditors. Thus, straight bankruptcy is often not the right choice for those who wish to keep their property while also discharging debts.

Who is Eligible for Chapter 7 Bankruptcy?

Those who file for Chapter 7 bankruptcy in Tennessee have a household income below the state median and no disposable income after evaluating specific pre-approved payments.

What are Unsecured Debts?

Unsecured debt is a loan made to an individual without putting any assets up as collateral. If a person cannot pay their unsecured loan debt, there are no assets to seize.

However, lenders usually charge much higher interest rates for unsecured debts versus secured debts since they have a less stable future. The interest cost is added to the initial loan balance by the lender and repaid along with the initial debt.

Businesses in significant debt that want to stay open often choose to file for Chapter 11 bankruptcy. Both large companies and very small businesses can file Chapter 11 bankruptcies.

A business must be classified as a corporation, partnership, or LLC to file a Chapter 11 bankruptcy. A small business can only file under Chapter 11 if they are unable to file under any other type of bankruptcy.

As soon as a Chapter 11 bankruptcy is declared, an automatic stay begins that prevents any creditors from collecting debts. The stay allows you to create a plan to restructure any debts while also keeping your business open. You will get to propose this restructuring plan to creditors for their approval. Before moving forward, a bankruptcy court and at least some of your creditors must approve the plan.

There are various approaches to restructuring your business after declaring Chapter 11 bankruptcy. One common option is creating a plan to reduce spending. In other situations, the business can dissolve some of its assets to pay creditors. One benefit of filing a Chapter 11 bankruptcy is a possible extension of the timeline for repaying debts.

Chapter 13 bankruptcy allows you to reorganize your debts and make a plan for repayment over the next three to five years. Unlike in Chapter 7, Chapter 13 does not discharge your debts.

If you have collateral-secured debts, Chapter 13 bankruptcy may be the right choice for you. Filing bankruptcy activates an automatic stay that temporarily prevents creditors from collecting money from you.

One of the most important aspects of Chapter 13 bankruptcy is that it allows you to save your home from foreclosure. During the automatic stay, you will work with a lawyer and perhaps a credit counselor to create a plan to pay existing debts.  (It is important to note that while Chapter 13 bankruptcy lets you repay existing mortgage payments, during the bankruptcy period itself, you must pay your mortgage payments on time.)

In many Chapter 13 cases, you will work with a lawyer to develop documentation of your current financial status as well as a plan for repayment. This documentation can include a statement of your finances, a statement of your monthly net income, any recent pay stub, proof of meeting with an approved credit counselor, and schedules of current assets and liabilities, among other relevant information.

To file for bankruptcy in the state of Tennessee, you must first pass the bankruptcy means test.

The Bankruptcy Reform Act of 2005 created this test. Its purpose is to ensure that people who are filing for bankruptcy require that level of assistance. The bankruptcy means test focuses on those eligible for filing for Chapter 7 bankruptcy, which usually discharges all unsecured debts.

The Chapter 7 means test takes into account your household income and your disposable income to determine your filing eligibility. Your household income must be below the Tennessee median to file for Chapter 7. You also must have no disposable income available after taking into account specific pre-approved payments.

As of May 2020, the median annual income for a Tennessee household of two residents is $60,913.00, or $5,076.08 per month. However, the median household income varies over time, so it is essential to confirm the qualifying income at the time of filing.

If your household income is lower than this amount, you are eligible for filing for Chapter 7 bankruptcy regardless of your other finances. If your household income is higher than the Tennessee median income, then your net income is also considered.

In many cases, bankruptcy will stop foreclosures or repossessions, but not always. However, declaring bankruptcy can almost always delay foreclosures or repossessions, thanks to an injunction called an automatic stay.

As soon as you declare bankruptcy, your home will have an automatic stay. This stay is what stops creditors, collection agencies, and others from harassing you for payment. An automatic stay also prevents foreclosing on your property or repossessing collateral assets.

Foreclosures and Repossessions in Chapter 13 Bankruptcy

Filing with Chapter 13 ensures more success in keeping your home. Even if you are severely behind on mortgage payments, an automatic stay will temporarily prevent mortgage lenders from asking for payment.

This stay provides you with the time to work with lawyers on creating a repayment plan for your debts. In these plans, debts secured with property, like mortgage payments, and other significant assets, like cars, are prioritized to be paid back first.

Foreclosures and Repossessions in Chapter 7 Bankruptcy

Chapter 7 bankruptcy also creates an immediate automatic stay, which can stall any foreclosure or repossession that may be happening. However, filing for Chapter 7 bankruptcy means the complete liquidation of your assets. If your debt exceeds the limits of exempt assets, creditors can seize property or other assets for repayment.