bankruptcy blog
Chapter 12 Bankruptcy In Nebraska
New Chapter 12 Bankruptcy Law to Help More Farmers
In the fall of 2019, Congress passed the Family Farmer Relief Act of 2019, which increased the debt limit for Chapter 12 bankruptcy. This law financially benefits family farmers in Nebraska. The amount of debt a family farmer may have to qualify almost doubled to $10,000,000.
Factors for Farmers to Consider
Expanding eligibility means that more family farmers are likely to look to Chapter 12 bankruptcy as a viable solution. For the Nebraska family farmer debating a whether to file bankruptcy, here are some factors to consider:
- You can’t find a lender for the 2020 season, but you might be able to operate on current or incoming cash from sale of grain, cattle, machinery, equipment, or insurance checks.
- Your bank is unwilling to refinance your debt and you have little to no equity.
- You want to let go of low performing land leases that lose you money.
- You intend to sell land, machinery, or equipment and anticipate a large capital gains tax bill from the IRS.
- You attempted mediation, but it went nowhere.
- You co-signed, guaranteed or pledged assets as collateral on a family member’s farm debt and that family member has defaulted or filed bankruptcy.
Filings on the Rise!
And know that you are not alone! In 2019, there were 40 Chapter 12 bankruptcy cases filed in Nebraska. This is the highest number of filings since the 55 filed in 2003. These cases have steadily been on the rise with 8 filed in 2015, 12 in 2016, 20 in 2017, and 27 in 2018. The new law may result in a record number of filings in Nebraska during 2020.
Deciding whether to file a bankruptcy is a complex and emotional decision. Finding the right attorney to work with you is crucial. Instead of worrying what will come next, meet with a bankruptcy attorney to discover your options for your financial situation.
Learn more about Chapter 12 Bankruptcy Eligibility
Expanded Eligibility for the Financially Distressed Family Farmer
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.
- 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.
- 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.
- 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.
- Designed to keep family farms intact. The Chapter 12 exists specifically to provide family farmers with a bankruptcy solution tailored to their unique needs.
- 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.
Nebraska Flood Relief: How a Bankruptcy Can Help
With the devastating floods hitting Nebraska, many individuals are left wondering how they are going to deal with the financial distress that the flooding has caused. Even with flood insurance, some policies may not cover the type of flooding that occurred. Farmers have lost entire herds of livestock. People have lost homes. Businesses have lost entire fleets of trucks. It can be overwhelming.
When dealing with the financial distress exacerbated by a flood, bankruptcy may be the ideal solution. A bankruptcy does not mean you are giving up, it helps provide the tools to move forward.
Chapter 7 Bankruptcy
With a Chapter 7 Bankruptcy, you are able to eliminate your legal obligation on your home mortgage, car loans, credit cards, and medical bills. Wherever you are in Nebraska, you can move forward debt free so that you can focus on rebuilding your life after the flood. The Chapter 7 Bankruptcy process from filing to discharge of debt takes 3-4 months.
Chapter 13 Bankruptcy
With a Chapter 13 Bankruptcy, you are able to handle your debts through a voluntary 3-5 year repayment plan. The Chapter 13 Bankruptcy works well for individuals impacted by the flooding in Nebraska, who have fallen behind on house or car payments, but want to cure the default payments.
Chapter 12 Bankruptcy
For the farmer facing financial hardship because of the flood, a Chapter 12 Bankruptcy is designed to provide assistance through a plan of reorganization/liquidation. One of the main benefits is that any income tax liabilities incurred through liquidation are handled just like a credit card or medical debt.
Chapter 11 Bankruptcy
For the small business owner in Nebraska, the flood may have destroyed equipment, facilities, and vehicles. It may impact customers who no longer have the ability to pay for goods or services. It may impact labor that is unable to make it to work. This all impacts the bottom line and the ability to service debt. A small business in Nebraska may use a Chapter 11 Bankruptcy to restructure/reorganize its business, using the benefits of the bankruptcy laws to do so.
Non-Bankruptcy Debt Resolution
For those experiencing flood-related financial distress in Nebraska, your lenders or the bank may be more willing to work with you to restructure your debt or provide temporary relief.
Tax Benefits for Family Farmer Filing For Chapter 12 Bankruptcy
With the current state of the farm economy in Nebraska, many family farmers are considering their options for dealing with overwhelming debt. In many situations, the farmer owes one bank who in turn has a lien or security interest in all of the farmer’s assets (land, equipment, machinery, fertilizer, etc.). Failure to pay short-term or balloon notes that come due all at once, may lead to a situation where the bank threatens to take or does take some or all of the assets that served as collateral for the loans. In some situations, the farmer may voluntarily surrender or turn over the assets to satisfy some or all of the debt owed to the bank. In still other situations, the farmer and the bank may agree to allow for the sale of the collateral with the proceeds used to pay down or off the bank loan.
When faced with a sale, liquidation or repossession of assets, a farmer should be considering the tax consequences of those actions. Under the Internal Revenue Code, these events may trigger tax liabilities. It would be like getting the monkey off of your back and replacing it with a baby gorilla, trading one problem for another.
Formerly, filing for a Chapter 12 bankruptcy did a family farmer little good if a sale, liquidation or foreclosure occurred before or during the bankruptcy. Under the former federal bankruptcy law, a resulting tax liability was considered a priority unsecured debt that the farmer had to pay in full through the 3-5 year Chapter 12 repayment plan. In many instances, this left many family farmers unable to move forward because of his or her inability to pay the tax debt in full.
However, in October 2017, Congress passed the Family Farmer Bankruptcy Clarification Act of 2017, an amendment to the bankruptcy law regarding the treatment of tax debt in Chapter 12 bankruptcy for family farmers. Now, the resulting tax liability from the sale, foreclosure, or liquidation of a farm asset that occurs before or after the Chapter 12 bankruptcy is considered a general unsecured debt, meaning that the bankruptcy laws do not require that these debts be paid in full, allowing many more family farmers to feasibly reorganize.
As such, it provides a viable solution for more family farmers to wind down the entire farm operation or a portion of the operation without being faced with an insurmountable tax bill. The new law provides the farmer with an opportunity to start anew and move forward by filing a Chapter 12 bankruptcy.
Transferring Property Before Bankruptcy
“I can just give my truck to my brother, right?” Many clients and prospective clients have asked me some variation of this question. The quick answer is an outright “no” because doing so may be a fraudulent transfer.
Under Nebraska State Law, a person cannot simply transfer an asset without receiving reasonably equivalent value in exchange for the transfer if that person is insolvent or if the person becomes insolvent as a result of the transfer. Otherwise, a person would have incentive to transfer all property to another without receiving anything in exchange if they were trying to shield assets from their creditors or from liquidation in a Chapter 7 bankruptcy.
For example: You own a truck worth $15,000. As I have previously discussed, you will be able to exempt $10,000 under the new Nebraska Exemption Laws, leaving $5,000 as unexempt (unprotected) and subject to liquidation in a Ch.7. If you simply re-titled the vehicle in your brother’s name without receiving any payment and then file Chapter 7 bankruptcy, the Chapter 7 Trustee may go get the truck from your brother and undo the transfer.
The look-back period under Nebraska State Law is four (4) years, meaning that your creditors or the Chapter 7 Trustee can look at all transfers made within four (4) years to see whether or not a fraudulent transfer has occurred. Under bankruptcy law, the look-back period is two (2) years.
Under bankruptcy law, you may be denied your discharge (elimination of legal obligation on your debts) if you transferred property within the one year prior to filing with the intent to hinder, delay, or defraud a creditor. A creditor would have to bring a lawsuit (called an adversary proceeding) against you to have the Bankruptcy Court determine that you should be denied a discharge. Even though these are uncommon actions that creditors bring, it is still something to be mindful of.
For example: If you gave title to your brother without him paying for it, you would have to list that in your eventual bankruptcy paperwork. A creditor that is paying attention may use that as evidence that you should be denied your discharge.
You can avoid these issues by doing one of the following:
- Receive proper value for the transfer. Your brother can buy your truck for $15,000.
- Undo the transfer. Have your brother transfer the truck’s title back to you.
- File a Ch. 13 bankruptcy. You can repay the value of the transferred asset to your creditors through a 3-5 year repayment plan.
- Wait to file. If you cannot do one of the above actions, you can choose to wait beyond the reach of the look-back period.
Solutions for Farmers with Financial Troubles
Nebraska farmland spreads out in beige-grey sheets all around us. Cows graze in the winter cornfields. Grain elevators pepper the vistas like statuesque farmers awaiting a harvest. The terrain looks like it is bracing for a dark stormy winter with gusts of winds approaching 50 mph.
On our trip from Omaha to Davenport, Nebraska, my father-in-law Howard Duncan and I discuss his growing up on a wheat farm in Southern Kansas. He knows what it means to put in a 14-hour day bailing hay and working the field. He knows what it means to have your livelihood at the whims of a hail storm or a lightning fire.
As bankruptcy attorneys, we have been discussing the financial distress that Nebraska farmers and rural residents are experiencing. During the first quarter of this year, Nebraska had the slowest growing economy out of any state. The leading cause was our distressed agribusiness sector. Corn prices are low. Farm cash rental rates are relatively high. Farmers have run out of working capital and borrowed operating cash against their land, which is a recipe for disaster.
As we sit in the Davenport Community Center, you get the sense that the farmers and bankers are holding their breath, bracing for tough times ahead. It is not a matter of if a crash will happen but when it will happen. One of the speakers comments that we are not at the breaking point…yet. The two farmers at our table audibly laugh, echoing the word “yet,” almost acknowledging to each other that they are at or past the breaking point.
Like so many other rural communities, the grocery store closed within the last year or two. Businesses in town have a tough time keeping their doors open. Money flows out of the community. People are holding on. In many rural Nebraska communities, there is limited or no access to an attorney to advise or assist when financial distress rears its ugly head.
Whether you are a rancher, farmer, or person living in a rural community, we are here to help you.
When it comes to dealing with financial troubles there are both bankruptcy and non-bankruptcy options. The Chapter 12 bankruptcy is specifically designed to help the family farmer deal with financial issues pertaining to their farm. In a Chapter 12 bankruptcy, the bankruptcy “automatic stay” protects the farmer from creditors, allowing them time to propose a plan to reorganize and repay their debt. In addition to a Chapter 12 farm bankruptcy, you may be able to file a Chapter 7 or Chapter 13 to deal with personal debt. Our attorneys have been successful in restructuring or reorganizing debt by negotiating or working with your lender where we use bankruptcy as a safety net.