DOUGLAS GERMAN,
EXECUTIVE DIRECTOR
JAMES GORDON,
board of directors president
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Farm Bankruptcy in Nebraska Introduction Bankruptcy is rarely, if ever, the first choice of farm families facing financial difficulty. But thousands of Nebraska farmers have used the provisions of federal bankruptcy law to reorganize their farm finances and continue to farm or to leave farming with a cleaner slate than might otherwise be possible. No other legal tool has proven as useful in helping financially struggling farmers, since even many negotiated settlements and government debt restructuring programs are based on the concepts and procedures found in bankruptcy law. It’s therefore one of the first alternatives a farm family should consider and review with an attorney when facing financial problems. This brief description of bankruptcy practice in Nebraska is designed as a general introduction and is not intended to provide specific legal advice. It’s vital that any farm family facing financial problems seek help from an experienced bankruptcy attorney before taking action. Impact of bankruptcy on credit One of the most common questions people have about bankruptcy is “what impact will it have on my credit?” The only absolute answer to that question is that a bankruptcy filing will be noted on a person’s credit report for ten years. Beyond that there are no specific rules. Some lenders will consider the bankruptcy to be an example of a person’s inability to be trusted to repay debts. Other lenders may see a bankruptcy as a “fresh start” that leaves a person with a clean slate of no debts but possibly some assets to use as collateral. Much of the impact will thus depend on a person’s past credit history beyond the bankruptcy, their personal relationship with the lender, and their present and future income and assets. Nebraska bankruptcy exemptions Bankruptcy law allows debtors to “exempt” certain assets from collection by a creditor. The use of these exemptions and the reaffirmation of some debts may allow a farmer to keep farming. In Nebraska each debtor may exempt: 1. All personal possessions 2. Wearing apparel 3. Household goods worth $1500 or less 4. Equipment or tools, worth $2400 or less 5. Unemployment and workers compensation benefits 6. Fuel necessary for six months 7. A homestead equity value of $12,500 8. Any personal property worth $2500 if not claiming a homestead 9. Annuity or life insurance proceeds or cash values of $10,000 or less 10. Interests in pension or profit-sharing plans necessary for the debtor’s support. Chapter 7 Bankruptcy Chapter 7 bankruptcy is the most common type of bankruptcy and probably the one most people think of when considering the consequences of filing bankruptcy. Chapter 7 is the least expensive form of bankruptcy and the quickest. In it, debtors agree to liquidate all assets that aren’t exempt or, if used as security for a loan, they wish to keep by reaffirming the debt and continuing to make payments. Chapter 7 is used most often by farmers who wish to discharge all debts and are willing to liquidate assets because they are leaving farming. After a Chapter 7 is filed, a trustee is appointed to review the debtor’s statement of assets and liabilities and make a determination on whether any equity is available for unsecured creditors. After this review is made, secured creditors are allowed to pursue liquidation of any assets they have as collateral and unsecured creditors share in any remaining equity. One of the most important aspects of any type of bankruptcy is that when it is filed, all actions by creditors to collect a debt must be stopped. This “automatic stay” can only be lifted by order of the court. This automatic stay can be critical to stopping a foreclosure or other debt collection proceeding until a farmer decides how to proceed. Chapter 11 Bankruptcy Chapter 11 is another type of “reorganization” bankruptcy, typically used by larger businesses and farms not eligible for Chapter 12. Chapter 11 has proven difficult for many farmers because of the requirement that both secured an unsecured creditors be allowed to vote on whether to accept or reject a plan of reorganization. Typically, creditors are put into “classes” of claims, depending on whether they are secured or unsecured and whether they have priority over other claims, e.g. tax claims. A class of claims is deemed to have accepted the plan if creditors holding at least two-thirds of the amount of the total claims and more than one-half of the number of total claims votes to accept the plan. If there are impaired claims, meaning they will not be fully repaid, the plan cannot be confirmed unless at least one class of impaired claims votes to accept the plan. For the first 120 days after a bankruptcy is filed, debtors have the exclusive right to submit a proposed plan. They have an additional 60 days in which to try to get the plan accepted by creditors. If no plan has been accepted after 180 days, creditors may submit their own plan, which is likely to include significant liquidation of assets. Besides the procedure for obtaining confirmation of a plan, many other aspects of Chapter 11 are similar to those of Chapter 12 or 13, such as the use of cash collateral, obtaining of secured debt, and operation of the farm in the ordinary course of business. However, because of the complex rules governing confirmation of a plan, Chapter 11 has often been more costly and less successful than Chapter 12. Chapter 12 Bankruptcy Originally adopted in 1986, Chapter 12 is one of the most “pro-farmer” laws created by Congress. It allows farmers to restructure their loans, perhaps by changing interest rates, stretching out the term of the loans, or writing off unsecured debt. While Chapter 12 has expired and been extended several times over the last ten years, a bill now in Congress would make Chapter 12 a permanent part of the law, raise the debt limitations, and address capital gains tax problems when selling farm assets. Eligibility Chapter 12 is available to farmers with debts less than $1.5 million (80% of which arose from the farming operation) and who received 50% of his or her gross income in the previous year from farming. If the debtor is a corporation, 50% of the stock must be held by members of a family; more than 80% of the corporate assets must be used in the farming operation; and debts must not exceed $1.5 million (80% of which arose from the farming operation). Chapter 12 debtors must be engaged in a “farming operation,” which would encompass the typical Nebraska crop/livestock farm but also has been ruled by some courts to include activities like game farms, fish hatcheries, cash rent, and timber harvesting A Chapter 12 Bankruptcy “Plan” A debtor’s reorganization plan must be filed within 90 days after the bankruptcy is filed. In general, the plan proposed must provide all creditors with the same amount of money the would receive in a Chapter 7 or “liquidation” bankruptcy. After determining how much a secured creditor would receive if its collateral was liquidated, a farmer’s Chapter 12 plan has to propose to pay that same amount over a period of years. The amount to be paid a secured creditor may be less then the current debt if there is insufficient collateral. It may also be paid over a longer period of time and at a lower interest rate, depending on what the current loan terms require. If a creditor is fully secured, no write-down of debt is usually possible. The most that might be done is to restructure the loan with a longer amortization or a lower interest rate. This may be all that’s needed to help a farmer stay in business though. Property taxes and recent income tax obligations have to be paid in full. Unsecured creditors often are paid little or nothing but may receive payments if a farmer has “disposable income.” Feasibility of a chapter 12 plan Key to the success of a Chapter 12 bankruptcy plan is the ability of the farmer to “cash flow” the restructured loan terms. Even with a write-down of debt and reamortized loan terms, a farmer in Chapter 12 must still be able to show repayment of debts, often leveraged at 100% of equity. It’s important to have either historical data supporting the proposed income and expenditures or good justification for departing from it. Prior years tax returns will have to be presented to show whether the proposed plan is supported by past income and expense history. Special bankruptcy provisions allow farmers to cut off the liens of lenders so that new financing can be obtained for operating purposes. That new lien will have priority if the bankruptcy is filed before the crop is planted. A farmer under a Chapter 12 plan might also have more freedom to use cash collateral (crops, livestock, milk) to pay operating and living expenses than if dealing with a lender outside bankruptcy. Chapter 13 Bankruptcy Chapter 13 bankruptcy is designed to help reorganize debts. It’s only available to individuals (not corporations) with less than $290,525 in unsecured debt and $871,550 in secured debt (adjusted periodically for inflation). Over a 3-5 year period debtors make payments to a trustee who disburses the funds to unsecured creditors. Secured creditors may also be paid by the trustee or directly by the debtor. The plan may classify claims so that one group of claims is treated differently, although similarly situated claims must be classed together. Because of the debt ceilings and limitations on modifying secured debt beyond the 3-5 year plan period, Chapter 13 has not proven as useful for farmers as Chapter 12. Chapter 13 is often used to “cure” defaults on residential mortgages. Some farmers with smaller debt and the right type of secured debt may be able to use Chapter 13 when Chapter 12 is unavailable or too costly.
Bankruptcy
is not a perfect solution for every farmer experiencing
financial difficulty, but it can be a very effective tool
for farmers unable to get their lenders to voluntarily
restructure loans or to make concessions that would be
required in a bankruptcy proceeding. Nebraska farm families
facing financial problems should talk with an experienced
farm bankruptcy attorney before agreeing to liquidate assets
or otherwise make promises to their lenders.
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