Congress passed a new law to increase the debt limit for Chapter 12 Bankruptcy, which will benefit financially distressed family farmers in Nebraska obtain bankruptcy relief. Under the new bankruptcy law that just went into effect, the Family Farmer Relief Act of 2019, the amount of debt a family farmer may have to qualify for a Chapter 12 bankruptcy almost doubled to $10,000,000.

For family farmers who are in financial distress, this change opens the doors to a viable bankruptcy solution. Previously, when a family farmer in Nebraska didn’t qualify for a Chapter 12 bankruptcy because he or she exceeded the debt limit, there was few other viable bankruptcy solutions.

This typically meant that the only bankruptcy solutions the Nebraska family farmer could utilize was either the Chapter 11 or Chapter 7. The Chapter 11 bankruptcy may work well for some larger family farming operations but works poorly for many smaller family farms. This has to do with the requirement that family farmers end up having to pay back all the debt in full, which is infeasible for many cash strapped farmers. The Chapter 7 may work well for a family farmer looking to orderly liquidate assets and obtain a discharge, eliminating legal obligations on debts, but not for the farmer that is looking to continue farming in Nebraska.

The ongoing trade war with China has impacted the Nebraska farming industry tremendously. Add that to flooding and low grain/cattle prices and Nebraska family farmers are bracing for disaster.

Expanding Chapter 12 bankruptcy eligibility to more family farmers, hopefully means that more family farmers will look to Chapter 12 bankruptcy as a viable solution to reorganize.

  1. Capital Gains Tax. Outside of Chapter 12 bankruptcy, capital gains tax from sale of farm assets (machinery equipment) and arguably end products (grain, cattle, etc.) is a priority unsecured debt, which means the family farmer must pay it in full. In a Chapter 12, those same taxes are considered a general unsecured debt, meaning that the family farmer may only pay a pro rata or percentage of the debt based upon amount of disposable income or equity in property.
  2. Cure Defaults. Through a confirmed Chapter 12 plan, the family farmer can cure defaults of secured debt in order to retain property such as equipment, machinery, and land.  
  3. Controlled Sale of Assets. In many situations, the family farmer uses the Chapter 12 bankruptcy to downsize operations, selling assets and tapping into equity to pay down debt and to operate on. Using the Chapter 12 bankruptcy, the family farmer can avoid the fire sale or having to sell an asset at a less than ideal time.
  4. Designed to keep family farms intact. The Chapter 12 exists specifically to provide family farmers with a bankruptcy solution tailored to their unique needs.
  5. Opportunity to Pay Unsecured Creditors Less than 100%. In some instances, the family farmer may be able to pay general unsecured creditors (i.e. credit cards, vendors, suppliers, medical debt, etc.) less than 100% of the debt owed through the 3-5 year Chapter 12 bankruptcy plan.  

Deciding whether to file a bankruptcy is a complex and emotional decision. Finding the right attorney to work with you to make that decision is crucial. Instead of worrying what will come next, you should meet with a bankruptcy attorney to discover your options for dealing with your financial situation.

If you are someone you know is bracing for or already experiencing financial distress, the bankruptcy attorneys at Koenig|Dunne are here to help.

Patrick Patino

CategoryMoney Matters