Caution and Disclaimer: This information is NOT to be relied upon for legal advice. It is offered as educational information. See an attorney for legal advice. Each person's situation is unique and legal advice must be tailored to the particular facts and issues.
Chapter 7 Bankruptcy: Farm Liquidation
By
Ann Henderson and Stephen F. Matthews*
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The number of Missouri farmers filing bankruptcy petitions increased markedly each year from 1981 to 1985. The following table tells this unfortunate story:
Year Chapter 7 Chapter 11 Chapter 13 TOTAL
1981 96 11 8 115
1982 184 46 17 247
1983 199 110 11 320
1984 278 170 16 464
1985 337 136 14 487
TOTALS 1,094 473 66 1,633
Farmers filing for bankruptcy have two alternatives under the Bankruptcy Code: liquidation or reorganization. Chapter 7 of the act provides for liquidating the debtor's non-exempt assets and distributing the proceeds to creditors. Chapters 11 and 13, on the other hand, allow a debtor to propose a reorganization plan for repaying at least as much debt as would be paid in a Chapter 7 liquidation. Of the Missouri farmers who filed for bankruptcy over 1981-1985, one-third chose to propose repayment plans while two-thirds chose to liquidate under Chapter 7.
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This report discusses the primary characteristics of Chapter 7 bankruptcies. Chapters 11 and 13 are discussed in AG LAW SERIES 1986-8, "Chapter 11 and 13 Bankruptcies: Reorganization Plans". This information is not a substitute for consultation with an attorney. Since the Bankruptcy Code is both complex and subject to amendment, anyone contemplating bankruptcy should consult with an attorney.
BASICALLY, HERE'S WHAT TAKES PLACE IN CHAPTER 7
Under Chapter 7, a debtor relinquishes his "non-exempt" assets to a bankruptcy trustee. The trustee sells the assets and distributes the proceeds to the debtor's creditors. If the proceeds are not sufficient to pay all debts, some or all of the excess debt may be discharged. A discharge means that the debtor is no longer legally obligated to pay the debt. A debtor may, however, voluntarily pay a discharged debt if he becomes able to in the future. Debtors are limited to one Chapter 7 discharge every six years.
ARE ALL DEBTORS ELIGIBLE FOR CHAPTER 7?
With the exception of certain financial institutions and railroads, any debtor may file a Chapter 7 bankruptcy petition, no matter how much or how little he owes. However, a debtor who received a bankruptcy discharge in a case filed fewer than six years ago will not be eligible for another discharge.
Creditors of nonfarm debtors are permitted to file a petition that forces a debtor into a Chapter 7 bankruptcy proceeding. However, due to the cyclical nature of farming, creditors of farmers do not have this right. The Bankruptcy Code defines the term "farmer" to include only those who, during the previous tax year, received more than 80% of their gross taxable income from a farming operation they owned or operated. In recent years, however, some bankruptcy courts have allowed creditors to propose a liquidating plan similar to a Chapter 7 if the debtor voluntarily filed for Chapter 11 but did not propose or get approval for a reorganization plan.
PREPARING THE BANKRUPTCY DOCUMENTS
A farmer considering bankruptcy should make an appointment with an attorney to discuss his options. If, after consultation with the attorney, the debtor decides to liquidate under Chapter 7, several forms must be filled out, signed and filed with the bankruptcy court. These forms include a petition, a list of creditors, a schedule of assets and liabilities, a schedule of current income and current expenditures and a statement of the debtor's financial affairs. The petition informs the court that the debtor wants to proceed under Chapter 7 and provides the court with basic information about the debtor, such as his name, mailing address, social security number and residency during the past 180 days. A husband and wife who are jointly liable on debts may file a joint petition. The statement of financial affairs requires the debtor to furnish various types of information, including details about bank accounts and safe deposit boxes maintained within the past two years, property sold, traded, given away, lost or destroyed within the past year and the location of financial records and all assets. The debtor must certify "under penalties of perjury" that the information he has provided is true. In addition, if the debtor is a corporation, a corporate resolution authorizing the filing must accompany the petition.
The attorney will file the petition and forms with the clerk of the bankruptcy court located in the district where the debtor has resided for the longest portion of the preceding 180 days. In Missouri, there are two Bankruptcy Court Divisions, Eastern and Western, and petitions are filed in either Kansas City or St. Louis. However, the bankruptcy cases may be heard in outlying cities within the proper district. (Eastern Division: Cape Girardeau, St. Louis, Hannibal; or Western Division: St. Joseph, Joplin, Springfield, Jefferson City or Kansas City).
FILING AND ATTORNEY FEES
When a Chapter 7 petition is filed, the debtor must pay a $60 filing fee. Chapter 7 attorney fees must be "reasonable" in view of the time, nature and extent of the attorney's services and the fees the attorney charges in non-bankruptcy cases. Although attorney fees in most Chapter 7 cases in Missouri are around $600, (standard fee in the Western District) Missouri bankruptcy courts have approved fees of over $1,000. The attorney fees in a reorganization attempt are much higher, tending to cluster between $5,000 and $7,500. Chapter 11 or 13 attorney fees are simply determined by client-attorney negotiation, not by a court-recommended fee.
THE AUTOMATIC STAY
The filing of a bankruptcy petition has the effect of a court order that forbids creditors from taking any debt collection action against the debtor or his property. This means that creditors must stop all collection efforts, including foreclosure and repossession actions, lawsuits, telephone calls and letters. The only actions that may continue against the debtor are those that are criminal in nature, such as bad check prosecutions and alimony or child support collections. This "automatic stay" allows the case and everything connected with it to be handled in an orderly fashion in one court. It also helps insure that aggressive creditors will not benefit at the expense of other creditors.
MEETING WITH THE CREDITORS
Generally within 20 to 40 days after the petition is filed, the debtor and his attorney will meet with the debtor's creditors and the bankruptcy trustee, a meeting sometimes referred to as a "Rule 4002 meeting." The debtor may be asked questions about his debts, the property he owns, and what has happened in the past year to cause a loss of any property. He must answer these questions under oath. The sole purpose of the meeting is to bring out facts pertaining to the case. The bankruptcy trustee presides at this meeting.
THE TRUSTEE
Soon after the petition is filed, the bankruptcy court will appoint an interim bankruptcy trustee for the case. The interim trustee will act as the creditors' representative until the creditors hold their meeting. If the creditors do not elect a trustee, as is usually the case, the interim trustee will serve as trustee for the duration of the case. The trustee's primary responsibilities are to investigate the debtor's financial affairs, take charge of the debtor's assets, distribute the proceeds from the sale of assets to creditors in accordance with bankruptcy rules and make a final report and accounting to the bankruptcy court. The debtor must cooperate with the trustee as necessary to enable the trustee to perform his duties.
THE BANKRUPTCY ESTATE
By filing a Chapter 7 petition, a debtor relinquishes control over his assets. The assets become known as the bankruptcy estate. This estate includes all property in which the debtor has an ownership interest at the time he files a bankruptcy petition. It also includes some property (inheritances, death benefit proceeds and property acquired in a divorce proceeding) the debtor becomes entitled to within 180 days after filing. In addition, property, or the value of property, the debtor "unfairly" transferred to others within a certain period of time (90 days, or one year) before filing may be included in the estate. For example, if the debtor transferred an interest in property to one creditor at the expense of other creditors, the trustee may void the transfer and include the interest transferred in the estate. Such a transfer is called a "voidable preference".
The debtor must turn over, to the trustee, all property of the estate and any written information, such as books, documents, records, and papers, relating to that property.
POST-PETITION EARNINGS
Earnings from property included in the estate are part of the estate and, thus, will be retained by the trustees. However, wages the debtor earns after filing a petition and post-petition earnings on exempt assets are not included in a Chapter 7 estate and, thus, may be retained and used by the debtor.
EXEMPT PROPERTY
The debtor may retain some property by claiming exemptions. The type and value of property that may be claimed exempt from creditors' claims varies from state to state. For example, a Missouri debtor may exempt only $500 equity in an automobile while a Kansas debtor may exempt all of his equity in an automobile. "Equity" refers to the property value in excess of any specific claims against the property.
In a Missouri bankruptcy case, exemptions include:
1. Equity of up to:
(a) $8,000 in a homestead (house and related land, buildings and products);
(b) $1,000 in a mobile home used as the debtor's principal residence;
2. Up to $5,000 cash value in life insurance policies purchased more than six months prior to filing bankruptcy.
As an example, assume a debtor has an automobile that is worth $2,000. If there are no liens on the automobile, the debtor may claim a $500 automobile exemption. However, if debtor still owes $1,700 on the automobile, he may claim only a $300 automobile exemption.
Another frequent situation is the debtor with a home worth $50,000 but who still owes $40,000. Even though the debtor has $10,000 equity in the homestead, he can claim only a portion of the homestead not exceeding $8,000 in value, as exempt.
Husband and wife who file a joint petition will be allowed only one $8,000 homestead and one head of family exemption. However, they may each claim separate exemptions in other categories. For example, a husband and wife could together claim up to $1,000 equity in an automobile and $2,000 equity in household goods, clothing and other personal effects.
A debtor claims exemptions by filing a list of exempt items with the bankruptcy court. There is a space for listing exempt items on the official bankruptcy forms that are filed with the petition. The debtor must describe the items sufficiently enough for the trustee to identify them. A debtor who fails to list all his exemptions could lose property he otherwise would be entitled to keep.
REDEMPTION AND REAFFIRMATION
The debtor may retain certain property that is subject to a lien by paying the lien holder the amount of his claim or the value of the property, whichever is less. This is called a "redemption". The only property that may be redeemed, however, is property that is
(1) intended primarily for personal, family or household use and (2) either exempt or, because it cannot be repossessed profitably or is abandoned by the trustee. For example, if a farmer owes $400 on household appliances that are now valued at $800, he could keep the appliances by claiming his $400 equity as exempt and paying the creditor $400 with exempt cash or off-farm income earned after filing his petition.
A debtor may also keep other property subject to a lien by making a "reaffirmation" agreement with the lien holder. This requires the voluntary agreement with the creditor. For example, if the debtor still owed $1,700 on an automobile worth only $1, 700, he could keep the automobile if he "reaffirmed" his $1,700 debt to the lien holder. A reaffirmation agreement must be filed with the court before the discharge hearing. Such an agreement may be rescinded by the debtor any time before the discharge hearing or within 60 days after it is filed.
DISCHARGE
If the value of the bankruptcy estate is not sufficient to pay all debts, the Bankruptcy Court usually grants the debtor a "discharge" for the unpaid debts. A discharge bars creditors from doing anything to collect the unpaid debts. Some debts, however, cannot be discharged.
Debts that are not dischargable in a Chapter 7 case include: (1) debts not listed in the petition; (2) debts incurred after filing the petition; (3) alimony and child support; (4) student loans that were due within the five years prior to filing (or unless repayment would impose undue hardship on the debtor or his dependents); (5) fines and penalties; (6) punitive damage awards and other debts resulting from the debtor's willful, malicious injury to property; (7) income taxes on transactions that occurred within three years of the date of the filing of the petition; and (8) debts involving fraud, including debts secured by property the debtor sold without consent, credit card charges made shortly before filing with the intention of listing the debt in the bankruptcy petition, debts for which the debtor listed as collateral property he did not own; debts obtained by using false statements.
An individual debtor may be denied a discharge due to misconduct either during or in the year before the bankruptcy proceeding. For example, the court will not grant a discharge to a debtor who has:
failed to explain loss of assets;
made false statements about his financial affairs; or
refused to obey a Bankruptcy Court order.
After the property of the estate has been distributed to creditors, the bankruptcy court will hold a "discharge hearing". The judge will announce whether or not he will grant a discharge and, if not, the reasons for denying discharge. The debtor is required to be present at this hearing.
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*Henderson is an attorney and ag law research associate, and Matthews is an attorney
and professor of agricultural law; both are with the Department of Agricultural Economics,
University of Missouri-Columbia. Prepared April 22, 1986