The Tough Get Going
ADAM BIRK
CAPE GIRARDEAU, MISSOURI
When the going gets tough, the tough get going. If you read last week’s column, you will recognize this opening line as it is the exact same line. This article is number 2 of a 3 part series on Chapter 12 Bankruptcy for family farmers. The first article was a broad overview and introduction to bankruptcy. This second article will discuss the finer details of Chapter 12 Bankruptcy including qualifications, the process, and the end results of the bankruptcy. The third and final article in the series will discuss best practices to, hopefully, avoid bankruptcy all together; stay tuned next week.
With so much to discuss I will skip the usual philosophical thoughts such as “When looking for a spouse, one should check the plat book” or “Never trust someone claiming to be an expert grain-cart driver” and get straight to the point. Chapter 12 Bankruptcy is designed specifically for family farmers or family fishermen. There are differences in a few of the rules for farmers and fishermen, mainly in the qualifications, but I will only be discussing family farmers here. Although Chapter 12 is specifically designed for family farmers and has certain advantages, just because you are a family farmer doesn’t mean you have to or should file a Chapter 12. Obviously, it will generally be the best option for family farmers and thus why I am discussing it, but it is not the only option. Chapter 7 can be filed both as a business and individually. Chapter 13 could be best if you only want or need to file individually. Chapter 11, designed specifically for businesses, may be the only option for some farms if they don’t meet the qualifications for a Chapter 12. As always, consult an attorney to find out your best option.
So what are these qualifications to file a Chapter 12? A Chapter 12 may be filed as an individual, individual and spouse, or as a corporation or partnership. The Filer must be engaged in farming. Debts must not exceed $11,097,350. At least 50% of the debts must arise out of the farming operation. More than 50% of the gross income of the Filer must come from the farming operation. If the Filer is a corporation or partnership, more than 50% of the equity must be owned by one family and its relatives. There are still even finer details of these qualifications but this list hits the high points, consult an attorney to further verify whether or not you qualify.
To begin a Chapter 12 Bankruptcy you have to first file a petition with the court, just like any other time that a new case is opened. The big difference, as compared to other cases, is that bankruptcy has it’s own court and judges that handle nothing but bankruptcy and this is all conducted at the federal level, thus all bankruptcy takes place at a federal courthouse. In addition to the petition, you will also have to file a schedule of assets and liabilities, a schedule of income and expenses, a schedule of contracts and leases, and a current financial statement. Once all of this is submitted, the bankruptcy is officially underway and all the creditors will be notified. The automatic stay is now in place which stops creditors from taking any collection actions against you. A creditor meeting will be had roughly a month after filing. This meeting is where the Trustee, all the creditors who choose to attend, and the debtor and their attorney meet to discuss the financial affairs and proposed terms of repayment. Your attorney should have a general plan in mind going into this meeting; the meeting will help to dial it in and within 90 days (unless an extension is made) the repayment plan will be submitted for approval by the court. If the judge confirms the plan upon deciding it is feasible and meets all bankruptcy standards, then you enter the repayment phase.
The repayment phase can last 3-5 years, depending on the plan created and approved. As far as legal submissions go, the hardest part is behind you but not done. Quarterly reports are required to keep the Trustee up to date. These quarterly reports are essentially a Profit & Loss report for your farm business on a cash basis. You must keep quality accounting records throughout the bankruptcy of all income, expenses, new loans, and repaid loans. The debtors absolute most important job during the repayment phase is to actually make the payments to the Trustee on a regular basis. It is the debtor’s sole responsibility to ensure that the payments get to the Trustee. If payments are not made at any point, the entire bankruptcy can be thrown out and the creditors can reclaim their positions prior to the bankruptcy and be back at your door as if the bankruptcy never took place, because technically it was never completed and thus never did take place.
Upon completion of all payments under the Chapter 12 plan, you will receive a discharge of all the debts provided for and allowed under the plan. Creditors may no longer initiate or continue any legal actions to collect the discharged debts. In layman’s terms, the discharged debts are “wiped clean” and the creditor must give up on collecting them. Not all debts can be discharged and each debt falls into 3 types of claims: priority, secured, and unsecured. The specifics of what can be discharged and what can’t are exactly that; very specific. To figure out what you may be able to discharge, consult a bankruptcy attorney. But generally speaking, unsecured debts can be partially or fully discharged, secured debts must pay at least the value of the pledged collateral, and priority debts may not be discharged.
Stay tuned next week to learn more about bankruptcy and how to prepare for or hopefully avoid it all together. This article and the statements made within are intended for informational purposes only. In no way should this article and the statements made within be construed as legal advice. If you are considering bankruptcy, consult with your attorney. If you have questions regarding Chapter 12 Bankruptcy or have topics you’d like me to discuss, please email me at abirk@birklegal.com.
ADAM BIRK
CAPE GIRARDEAU, MISSOURI