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Farm & Ranch Bankruptcy. Joe M. Hawbaker Hawbaker Law Office Omaha, Nebraska . Assumptions & Disclaimer. People you work with have more “business” than “consumer” debt People primarily involved in agriculture

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farm ranch bankruptcy
Farm & Ranch Bankruptcy

Joe M. Hawbaker

Hawbaker Law Office

Omaha, Nebraska

assumptions disclaimer
Assumptions & Disclaimer

People you work with have more “business” than “consumer” debt

People primarily involved in agriculture

This material is general and educational. It is not a substitute for legal counsel.

some terms
Some Terms
  • Petition – document that starts a bankruptcy: important date
  • Bankruptcy Estate – property and interests of the debtor
  • Claim - a creditor’s right to payment
    • Pre-petition claim: claim that arose before bankruptcy was filed
    • Post-petition claim: claim that arises after bankruptcy is filed
some terms4
Some Terms

Three Types of Claims

  • Secured claim – a claim secured by lien on property of the estate
  • Unsecured claim – no lien, e.g. open account debts, credit card debts, medical debts, etc.
  • Priority claim – taxes, child support, alimony
some terms5
Some terms
  • Exemptions – property debtor gets to keep
    • Vary by state
    • Common exemptions include:
      • immediate personal possessions
      • wages
      • some amount of equity in home
      • some amount of equity in a vehicle
      • common household goods
      • life insurance cash value
      • qualifying retirement accounts
  • Exemptions typically apply only to equity in property
  • Sometimes can wipe a lien off exempt property
some terms6
Some Terms
  • Discharge – court order relieving debtor of personal liability for debts
  • Some particular debts are not dischargeable
    • Taxes
    • Child support, alimony
    • Student loans
    • Debts obtained through fraud or deception
    • Personal injury debts caused by drunk or drugged driving
  • Discharge may be denied entirely for dishonesty in dealing with bankruptcy
  • Dismissal – bankruptcy fails
four bankruptcies
Four Bankruptcies
  • Chapter 7
    • “Straight” bankruptcy, or liquidation
    • Keep exempt property, rest is sold to pay creditors
    • Can reaffirm secured debts
  • Chapter 13
    • “Wage earner” reorganization
    • Keep property by paying claims out of future income
  • Chapter 11
    • Business reorganization, but can be used by individuals
    • Creditors vote on plan
  • Chapter 12
    • Family farmer reorganization
    • The best of the lot if you’re eligible
liquidation v reorganization
Liquidation v. Reorganization
  • In liquidation, non-exempt property of debtor is transferred to trustee
  • In reorganization, debtor typically remains in control of property
chapter 12 eligibility
Chapter 12Eligibility
  • Engaged in a “farming” operation
  • More than half of gross income came from farming in year before debtor files bankruptcy, or, alternatively, in each of the two preceding years
  • Debt does not exceed $3,544,525
  • At least 50% of debt comes out of farming operation
chapter 12 powers
Chapter 12 Powers
  • Stop collection actions – lawsuits, foreclosures, etc.
  • Write down secured debt to value of collateral
  • Restructure secured debt under bankruptcy terms
  • Reject contracts and leases
  • Obtain new financing
  • Deal with taxes from sale of farm assets
chapter 12 nutshell
Chapter 12 Nutshell
  • Pay for what you keep, under bankruptcy terms
  • Surrender or sell what you don’t want to keep
chapter 12 procedure
Chapter 12 Procedure
  • File a petition (filing fee $239)
  • File Schedules and Statement of Financial Affairs
  • Attend 341 Meeting
  • Chapter 12 Trustee
    • Administers payments
    • Collects fee (10% of payments on impaired/modified obligations up to $4000 per year)
  • Chapter 12 Plan
    • Due 90 days after petition
    • Explains how debtor will treat creditors
    • Plan lasts from 3-5 years
  • Discharge
    • If Debtor complies with Plan, receives discharge
chapter 12 secured claims
Chapter 12Secured Claims
  • Value the collateral: appraisals, or by agreement
  • Determine status of secured claim: fully secured, oversecured, or undersecured
  • If undersecured, claim is written down to value of collateral
  • If oversecured, paid in full
chapter 12 secured claims14
Chapter 12Secured Claims

Repayment terms

  • Land debt: 20-30 years
  • Machinery: 3-7 years
  • Livestock: 5-10, depending on health of herd
  • Bankruptcy rate of interest = WSJ average national prime + 2 (currently 5.25%)
chapter 12 secured claims15
Chapter 12Secured Claims

Costs

  • If creditor is oversecured, and
  • If loan/security documents allow for recovery of costs, then
  • Creditor can impose its costs, including attorney fees, on the debtor
chapter 12 unsecured claims
Chapter 12Unsecured Claims

How Much Is Paid to Unsecured Creditors?

  • Liquidation Analysis
    • Value the property
    • Subtract amount of secured claims
    • Subtract value of exemptions
    • Subtract costs of sale (5-10%)
    • Subtract tax consequences of liquidation
      • How much would tax liability be if debtor sold everything in current year
    • Whatever if left, if anything, is amount debtor must pay to unsecured creditors
    • Typically paid over 3-5 years of plan, with no or minimal interest
chapter 12 unsecured claims17
Chapter 12Unsecured Claims

How Much is Paid?

  • Disposable Income
    • If trustee or unsecured creditor objects to treatment of unsecured claim, then
    • Debtor musts devote all disposable income for at least 3 years to repayment under Plan
    • Absent objection, disposable income requirement is optional
chapter 12 unsecured claims18
Chapter 12Unsecured Claims

Disposable Income

  • File quarterly reports with Trustee and disposable income determined at end of Plan, or
  • Project disposable income in a 3 year cash flow and pay that amount each year

Funds necessary to continue farming are not “disposable income”

chapter 12 executory contracts
Chapter 12Executory Contracts
  • Debtor may want to reject contracts and leases that are a financial burden
    • E.g. low grain contracts, equipment leases
    • Some USDA programs may be deemed executory contracts
  • To assume a contract or lease, need to be able promptly to cure any default
    • Must assume real estate leases within 120 days
chapter 12 operating in a 12
Chapter 12Operating in a 12
  • Post-petition financing
  • Use of cash collateral
chapter 12 post petition financing
Chapter 12Post Petition Financing
  • If bankruptcy filed before a crop is planted, lien on crop is extinguished
  • Debtor can use prospective crop to attract financing
  • Crop financer receives first priority court-approved lien on crop, and assignment of crop insurance proceeds, and FSA program payments, if necessary
chapter 12 post petition financing22
Chapter 12Post Petition Financing
  • Sometimes farmer is able to operate on open account
    • payment on inputs not due until after crop is harvested
  • Cash rent is a problem unless financing obtained
chapter 12 use of cash collateral
Chapter 12Use of Cash Collateral
  • By agreement or order of the court, debtor allowed to use proceeds from sale of collateral to meet operating/living expenses
  • E.g. livestock operation
    • Typically must pay their own way; hard to obtain new financing
    • Prepetition liens generally continue in offspring (calves, pigs), products (milk), and perennial crops
chapter 12 section 1222 taxes
Chapter 12Section 1222 & Taxes
  • Chapter 12 power to treat tax claims as unsecured debt instead of priority debt if
    • Tax debt arises out of sale of asset used in farming operation, e.g. capital gain liability on sale of land, breeding stock or equipment
    • In some cases, a way to wipe out tax debt from sell down of farm assets
  • IRS is contesting 1222 in court
    • So far the IRS is mostly losing
comments
Comments
  • Bankruptcy is a powerful tool, but usually the last tool one reaches for
  • Best approach is to build from cash flow
    • What can farm or ranch afford to pay?
    • Will a bankruptcy help?
  • If debtor fails to meet terms of confirmed plan, often difficult to repair a failing plan without some liquidation
    • Plan well from the start; may be last chance to make it work
chapter 7 straight bankruptcy
Chapter 7: Straight Bankruptcy
  • Liquidation – Debtor seeks to wipe out debts in exchange for giving up non-exempt property
  • Trustee is appointed to collect and sell assets and pay claims according to priority
  • Debtor keeps exempt property
  • Debtor may “reaffirm” some debts
chapter 7 straight bankruptcy27
Chapter 7: Straight Bankruptcy
  • Reaffirmation – an agreement, approved by the court, in which debtor promises to continue to pay a claim that might otherwise have been discharged
  • Used in Chapter 7s to keep property that has a lien on it
    • E.g. debtor owns car, wants to keep car, agrees to continue to be bound by contract for purchase of car
  • Can be used to make a 7 like a reorganization
  • May reduce bankruptcy expenses: 7 cheaper than reorganization
chapter 7 straight bankruptcy28
Chapter 7: Straight Bankruptcy
  • Means Test – if debtor has too much disposable income, may be forced out of Chapter 7 into Chapter 13 (consumer debt issue)
  • Abandonment – Trustee examines estate to determine if there is equity; if no meaningful equity, trustee abandons property
  • Cannot refile a Chapter 7 for eight years
chapter 13
Chapter 13
  • Primary differences with Chapter 12
    • Cannot restructure debt beyond term of plan itself
    • Debtor must be “individual with regular income” –
      • eliminates partnerships, LLCs or corporations
      • not set up for annual or semi-annual income
    • Cannot modify debt secured only by debtor’s residence
    • Debt limits for eligibility are $1 million
chapter 11
Chapter 11
  • Designed as commercial remedy; cumbersome for small business
  • More expensive
  • Difficult to get a confirmed plan
    • Creditors vote on plan and unsecured creditors can hold up confirmation
    • May require undersecured creditor to be treated as fully secured
    • Typically debtor cannot keep property if not paying secured and unsecured creditors in full
  • Creditors might file a competing plan
  • Only choice if debt exceeds Chapter 12 limits
article i section 8 u s constitution
Article I, Section 8U.S. Constitution

“The Congress shall have the Power…to establish…uniform Laws on the subject of Bankruptcies throughout the United States.”

resources
Resources
  • Joe M. Hawbaker, Hawbaker Law Office
  • David Goeller, UNL Farm Transition Specialist
  • Nebraska Farm Hotline
    • Phone 800-464-0258
  • Nebraska Farm & Ranch Clinics
    • Phone 800-464-0258
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