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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

Joe M. Hawbaker

Hawbaker Law Office

Omaha, Nebraska


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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.


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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


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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


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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


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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


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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


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Liquidation v. Reorganization

  • In liquidation, non-exempt property of debtor is transferred to trustee

  • In reorganization, debtor typically remains in control of property


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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


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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


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Chapter 12 Nutshell

  • Pay for what you keep, under bankruptcy terms

  • Surrender or sell what you don’t want to keep


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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


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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


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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%)


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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


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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


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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


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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”


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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


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Chapter 12Operating in a 12

  • Post-petition financing

  • Use of cash collateral


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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.”


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Resources

  • Joe M. Hawbaker, Hawbaker Law Office

    • Phone: 402-558-3540

    • Email: [email protected]

  • David Goeller, UNL Farm Transition Specialist

    • Phone: 402-472-0661

    • Email: [email protected]

  • Nebraska Farm Hotline

    • Phone 800-464-0258

  • Nebraska Farm & Ranch Clinics

    • Phone 800-464-0258


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