When a farmer is unable to continue to pay the bills both arising from the operation of the farm as well as personal obligations, he/she may face pressure and harassment from creditors. The farmer may even be subject to legal action taken on the part of the creditors against the farmer. One way that a farmer can respond to this pressure and harassment is to seek protection under the United States Bankruptcy Code. The United States Bankruptcy Code allows debtors suffering from financial hardship to settle their obligations by petitioning a federal court and developing a plan to either reorganize their debt or divide their available non-exempt assets among their creditors. There are several different plans, known as Chapters, that allow debtors to receive this relief.
Chapter 7 of the U.S. Bankruptcy Code deals with the liquidation and distribution of the debtor’s estate to his/her creditors. The bankruptcy code establishes a list of items which are exempt from being collected and liquidated as part of the bankruptcy. This list of exempted items varies from state to state but usually allows you to keep up to a certain amount of equity in your home, car, clothing, and home furnishings as well as many other necessary items. All possessions which are not exempt under the bankruptcy code are collected by a trustee appointed by the court and sold. The proceeds are then applied to the debts. Certain debts are not dischargeable in bankruptcy court. Debts that are not dischargeable include most taxes, school loans, child support, and alimony.
Chapter 11 of the U.S. Bankruptcy Code addresses the reorganization of the debts of a business. Under a Chapter 11 plan, a business debtor enters into an agreement with its creditors under which all or part of its business is allowed to continue. The debts of the business are restructured in such a way as to hopefully allow the business to successfully service its debts.
Chapter 12 of the U.S. Bankruptcy Code deals specifically with the adjustment of debts of a family farmer with regular annual income. Chapter 12 requires that for the tax year before filing, 50 percent of the debtor’s gross income must come from farming while total debts must not exceed $3,237,000 and at least 50 percent of the debts must come from the farming operation. Closely-held entities, such as corporations or limited liability companies, are also eligible if one family owns more than 50 percent of the stock or equity, members of the family conduct the farming operation, more than 80 percent of its assets are related to the farming operation, and its debts do not exceed $3,237,000. In addition, at least 50 percent of that debt must have arisen from the farming operation.
Once the bankruptcy case is filed, a trustee is appointed to help administer the case. The debtor, however, is entitled to remain in possession of the farm assets, subject to specific duties and can only be removed for cause. A meeting of creditors is held where the debtor is questioned by creditors and the trustee. The Chapter 12 debtor has ninety days from filing to propose a three- to five-year plan of reorganization. This plan must meet specific statutory requirements. For example, secured creditors generally are entitled to receive at least the value of their collateral and unsecured creditors must receive at least as much as they would receive under a Chapter 7 liquidation. All “disposable income” during the plan term is to be paid on unsecured debt. The plan must provide for full payment of priority debts. A bankruptcy judge will evaluate the debtor’s plan at a confirmation hearing and, if the judge deems the plan feasible and in compliance with the Bankruptcy Code, it is confirmed. Upon completion of the plan the debtor is granted a discharge. In certain cases, a hardship discharge may be granted if the plan was not completed due to circumstances for which justice demands that the debtor not be held accountable.
Chapter 13 of the U.S. Bankruptcy Code deals with the reorganization of the debts of an individual. Under a Chapter 13 plan, the individual debtor proposes a plan which establishes how the debtor’s obligations are going to be paid. This plan usually lasts for a period of between three and five years. During the pendency of the plan, the debtor will be protected against wage and property garnishments and may keep possession of all of his/her property. The proposed plan must be approved by the bankruptcy judge and the creditors are allowed to file and be heard regarding objections to the plan. Certain debts are not dischargeable under a Chapter 13 plan. These include debts whose original term of payment is longer than the time of the proposed repayment plan, alimony, and child support. Debts which were incurred after the filing of the bankruptcy petition and were not approved in advance by the bankruptcy trustee are also not dischargeable.
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