Farm & Ranch Bankruptcy

1. Farm & Ranch Bankruptcy Joe M. Hawbaker Hawbaker Law Office Omaha, Nebraska

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. Liquidation v. Reorganization • In liquidation, non-exempt property of debtor is transferred to trustee • In reorganization, debtor typically remains in control of property

9. 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

10. 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

11. Chapter 12 Nutshell • Pay for what you keep, under bankruptcy terms • Surrender or sell what you don’t want to keep

12. 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

13. 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

14. 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%)

15. 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

16. 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

17. 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

18. 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”

19. 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

20. Chapter 12Operating in a 12 • Post-petition financing • Use of cash collateral

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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.”

32. Resources • Joe M. Hawbaker, Hawbaker Law Office • Phone: 402-558-3540 • Email: mjbaker@radiks.net • David Goeller, UNL Farm Transition Specialist • Phone: 402-472-0661 • Email: dgoeller@unl.edu • Nebraska Farm Hotline • Phone 800-464-0258 • Nebraska Farm & Ranch Clinics • Phone 800-464-0258