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
Stephen F. Matthews and
Elizabeth S. Schilling*
(August 2009)
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, 12 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.
Prior
to October 17, 2005, most debtors could obtain a discharge of their debts under
a Chapter 7 bankruptcy. However, the
Bankruptcy Code underwent major changes on April 20, 2005, when President Bush
signed into law the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 (the “BAPCPA”).
These provisions went into effect on October 17, 2005 which generally
targeted consumer bankruptcy cases and makes
it more difficult for some individuals to obtain a discharge from their debts.
These provisions and their applications are relatively new, and may affect an
individual’s case. Therefore,
consultation with a competent bankruptcy attorney is needed.
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" as follows: The
individual or husband and wife must be engaged in a farming operation or a
commercial fishing operation; the total debts (secured and unsecured) of
the operation must not exceed $3,544,525 (if a farming operation) or $1,642,500
(if a commercial fishing operation); if a family farmer, at least 50%, and if
family fisherman at least 80%, of the total debts that are fixed in amount
(exclusive of debt for the debtor’s home) must be related to the farming or
commercial fishing operation; and
more than 50% of the gross income of the
individual or the husband and wife for the
preceding tax year (or, for family farmers
only, for each of the 2nd and
3rd prior tax years)
must have come from the farming or
commercial fishing operation.
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.
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.
With the passage of BAPCPA,
debtors are limited to one Chapter 7 discharge every eight years if he
previously filed a Chapter 7. However,
if the debtor previously filed a Chapter 12 or 13 bankruptcy, he may be
permitted to file a Chapter 7 in six years depending on his prior repayment of
debts in the prior case.
ARE ALL DEBTORS ELIGIBLE FOR CHAPTER 7?
NOT ANYMORE! Prior to October 17, 2005, with the exception of
certain financial institutions and railroads, any debtor could file a
Chapter 7 bankruptcy petition, no matter how much or how little he owed.
However, with the passage of BAPCPA, debtors must now pass a means tests to determine eligibility for filing a Chapter 7 bankruptcy case. If your income (based on Census Bureau statistics) is below the median income for families in Missouri, you will be eligible. If you make more than the median income for families in Missouri, your income over the past six months is considered, along with mortgage and car payments, back taxes and child support due, and school expenses up to $1,650 per year. You will not be eligible for a Chapter 7 bankruptcy if, after deducting these amounts, and the living expenses provided in the Internal Revenue Service's national collection standards, you can still pay at least $6,000 ($100/month) to unsecured creditors over five years. If you cannot qualify for a Chapter 7 bankruptcy, your only option would be a repayment plan bankruptcy such as Chapter 11, 12, or 13.
The U.S. Trustee Program will apply the median family income data to all cases filed on or after March 15, 2009. This median family income data will be adjusted again after the Census Bureau updates the data. In Missouri, for cases filed after March 15, 2009, the median income used for a single wage earner is $39,563; for a family of two-$51,612; for three-$58,473; and four, is $70,363. For more than 4 persons, add $6,900 for each additional individual. http://www.usdoj.gov/ust/eo/bapcpa/20090315/bci_data/median_income_table.htm
Also beginning October 17, 2005, you must obtain approved credit counseling before you can file bankruptcy. The costs associated with the pre and post required approved credit counseling is approximately $68-$90. Additionally, a debtor must file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.
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, certification of credit counseling, 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 $299.00 which includes filing fee and a bankruptcy court administrative
fees. 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 range between $850-1,800, the Missouri bankruptcy courts must
approve the attorney fees. The
attorney fees in a reorganization attempt are much higher, tending to cluster
between $3,000 and $7,500. Chapter 11, 12 or 13 attorney fees are often
determined by client-attorney negotiation. However,
attorneys may choose a flat fee option which is set by the court. Factors
that attorneys use in determining the price of the case may include the number
of creditors involved and the complexity of the legal issues in the case.
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 $3000 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
(this is not an exhaustive list):
1. Equity of up to:
(a) $15,000 in a homestead
(house and related land, buildings and products);
(b) $5,000 in a mobile
home used as the debtor's principal residence;
2. Disability,
or illness benefits needed for support; unmatured life insurance policy;
fraternal benefit society benefits up to $5,000 that were purchased more than 6
months before filing; life insurance interest, loan value or dividends that were
purchased more than 6 months before filing for bankruptcy up to $150,000.
As an example, assume a debtor has an automobile
that is worth $3,000. If there are no liens on the automobile, the debtor may
claim a $3000 automobile exemption. However, if debtor still owes $2,500 on the
automobile, he may claim only a $500 automobile exemption.
Another frequent situation is the debtor with a
home worth $60,000 but who still owes $40,000. Even though the debtor has
$20,000 equity in the homestead, he can claim only a portion of the homestead
not exceeding $15,000 in value, as exempt.
Husband and wife who file a joint petition will be
allowed only one $15,000 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 $6,000 equity in an automobile and
$6,000 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:
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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*Matthews is an attorney and professor and Schilling is an attorney and ag law
research associate; both are with the Department of Agricultural Economics,
University of Missouri-Columbia. Prepared August, 2009