No one plans to file for bankruptcy. The typical scenario is a farmer is under financial stress and then a crisis happens—price decrease for crops, drought, major repair, etc. Bankruptcy is generally a last resort. If possible, the farmer should work with his creditors to develop a plan before getting the Court involved. Sometimes, however, that is not possible. A secured creditor may have initiated foreclosure proceedings or an unsecured creditor may have obtained a judgment with the intent to collect against the farmer’s machinery. In those cases bankruptcy may be necessary to “stay” or postpone those actions. Thankfully, farmers are exempt from the procedure that allows creditors to force debtors into bankruptcy.
A fundamental goal of the federal bankruptcy laws is to give debtors a financial “fresh start.” This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.
The Bankruptcy Code is found in Title 11 of the United States Code. There are four chapters that are typically mentioned when discussing bankruptcy, Chapters 7, 11, 12 and 13. Each are briefly outlined below. Much of the following material was extracted from Bankruptcy Basics. Administrative Office of The United States Courts. November 2011 Revised Third Edition. www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics.
Chapter 7 provides for the liquidation of the debtor’s non-exempt assets to satisfy the creditors’ claims against the estate. Non-exempt assets may include transfers and obligations during the previous two years and transfers to a self-settled trust for your benefit within the previous ten years.
Exempt assets may be modified by states but generally includes a motor vehicle, up to a certain value; reasonably necessary clothing; reasonably necessary household goods and furnishings; household appliances; jewelry, up to a certain value; pensions; a portion of the equity in the debtor’s home; tools of the debtor’s trade or profession, up to a certain value; a portion of unpaid but earned wages; public benefits including public assistance (welfare), social security and unemployment compensation accumulated in a bank account; and damages awarded for personal injury.
Most of the debts are discharged, meaning the debtor is no longer liable to his creditors. If the debtor’s current monthly income is more than the state median, the Bankruptcy Code requires application of a means test to determine whether the chapter 7 filing is presumptively abusive. A debtor who is not eligible under Chapter 7 and will probably have to use Chapter 13.
Chapter 13 was designed for wage earners who have smaller debts than most farmers. This chapter allows a person with “regular income” to propose a plan to repay creditors over three to five years. The advantage of Chapter 13 is that the debtor usually remains in possession of his property and makes payments to creditors, through a trustee, based on the debtor’s anticipated income over the life of the plan. To be eligible for Chapter 13 relief the debtor must have unsecured debts less than $360,475 and secured debts less than $1,081,400. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.
Chapter 11 is ordinarily used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.
Chapter 12 was added to the Bankruptcy Code in 1986 to help farmers and fishermen. It is more streamlined, less complicated, and less expensive than chapter 11, which is better suited to large corporate reorganizations. One requirement is regular annual income, to ensure that the debtor’s income is sufficiently stable and regular to permit the debtor to make payments under a chapter 12 plan. The debtor farmer proposes a plan to repay debts over time, usually three years, but no more than five. The farmer is allowed to continue operations while the plan is in place.
Do You Qualify for Chapter 12?
Under the Bankruptcy Code, “family farmers” fall into two categories: (1) an individual or individual and spouse and (2) a corporation or partnership. Farmers falling into the first category must meet each of the following four criteria as of the date the petition is filed in order to qualify for relief under chapter 12:
- The individual or husband and wife must be engaged in a farming operation.
- The total debts (secured and unsecured) of the farming operation must not exceed $4,031,575.
- At least 50%, of the total debts that are fixed in amount (exclusive of debt for the debtor’s home) must be related to the farming operation.
- More than 50% of the gross income of the individual or the husband and wife for the preceding tax year (or for each of the 2nd and 3rd prior tax years) must have come from the farming operation.
In order for a corporation or partnership to file under chapter 12, the corporation or partnership must meet each of the following criteria as of the date of the filing of the petition:
- More than one-half the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives.
- The family or the family and its relatives must conduct the farming operation.
- More than 80% of the value of the corporate or partnership assets must be related to the farming operation.
- The total indebtedness of the corporation or partnership must not exceed $4,031,575.
- At least 50% of the corporation’s or partnership’s total debts which are fixed in amount (exclusive of debt for one home occupied by a shareholder) must be related to the farming operation.
- If the corporation issues stock, the stock cannot be publicly traded.
Bankruptcy is a Burdensome and Invasive Procedure
There is a bankruptcy court for each judicial district in the country. Each state has one or more districts. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure and the local rules of each bankruptcy court.
No individual may be a debtor under chapter 12 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.
In order to complete the Official Bankruptcy Forms which make up the petition, statement of financial affairs, and schedules, the debtor will need to compile the following information:
- A list of all creditors and the amounts and nature of their claims, including executory contracts and unexpired leases
- The source, amount, and frequency of the debtor’s income, including tax returns
- A list of all of the debtor’s property
- A detailed list of the debtor’s monthly farming and living expenses, i.e., food, shelter, utilities, taxes, transportation, medicine, feed, fertilizer, etc.
Married individuals must gather this information for each spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, the trustee, and the creditors can evaluate the household’s financial position.
When a chapter 12 petition is filed, an impartial trustee is appointed to administer the case. The trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.
Filing the petition under chapter 12 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. As long as the stay is in effect, creditors generally cannot initiate or continue any lawsuits, wage garnishments, or even telephone calls demanding payments. Chapter 12 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a consumer debt from any individual who is liable with the debtor.
Between 21 to 35 days after the petition is filed, the chapter 12 trustee will hold a meeting of creditors. During the meeting the trustee puts the debtor under oath and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding the debtor’s financial affairs and the proposed terms of the debtor’s repayment plan.
Under the plan, secured creditors must be paid at least as much as the value of the collateral pledged for the debt. One of the features of Chapter 12 is that payments to secured creditors can sometimes continue longer than the three-to-five-year period of the plan. For example, if the debtor’s underlying debt obligation was scheduled to be paid over more than five years (i.e., an equipment loan or a mortgage), the debtor may be able to pay the loan off over the original loan repayment schedule as long as any arrearage is made up during the plan.
The plan does not have to pay unsecured claims in full, as long as it commits all of the debtor’s projected disposable income (or property of equivalent value) to plan payments over a 3 to 5 year period, and as long as the unsecured creditors are to receive at least as much as they would receive if the debtor’s nonexempt assets were liquidated under chapter 7. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents or for making payments needed to continue, preserve, and operate the debtor’s business.
The provisions of a confirmed plan bind the debtor and each creditor. Once the court confirms the plan, the debtor must make the plan succeed. The debtor must make regular payments to the trustee, which will require adjustment to living on a fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor may not incur any significant new debt without consulting the trustee, because additional debt may compromise the debtor’s ability to complete the plan. In addition, the court may dismiss the case or convert the case to a liquidation case under chapter 7 of the Bankruptcy Code upon a showing that the debtor has committed fraud in connection with the case.
The debtor will receive a discharge after completing all payments under the chapter 12 plan. Those creditors who were provided for in full or in part under the plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
The most common types of non-dischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, and debts owed to certain tax-advantaged retirement plans.
Bankruptcy at best will require you to live on a strict budget for three to five years and allow a trustee to review all of your spending. Bankruptcy may require the sale of most of your assets. It is not an action to take lightly.
*This article is for information purposes only and is not a substitute for legal advice or recommendations.