Dillon Law PC

Bankruptcy is a federal creation designed to allow persons and businesses who meet certain criteria to discharge (or remove) their obligation to pay debts they have incurred.

Farm businesses generally can file under Chapter 7, Chapter 12, and Chapter 13 of the bankruptcy code.  Each has different standards, rules and obligations.

First, some definitions. A person who owes money is a debtor. A person to who money is owed is a creditor. A Secured creditor is someone that a debtor owes money to and has offered something as collateral (some of your stuff like the car, the tractor or the house) to get the secured creditor to give them money. You are only a secured creditor if you have filed correct filing statements with the Iowa Secretary of State. For example, if you sell a tractor over time to your neighbor, and you file proper forms, you are a secured creditor. If you just lent money to someone without filing the paperwork, you are an unsecured creditor. The trustee is someone appointed by the court to supervise the action and find   assets to sell and pay the creditors. The Bankruptcy estate is all of the debtor’s possessions at the time of filing.  

A Chapter 7 bankruptcy is a liquidation bankruptcy. The debtor files a statement of assets and debts with the court and asks the court to order those debts non payable by the filing debtor. The debtor gets to retain a list of property for the debtor’s “fresh start.” In Iowa, this generally means $10,000 of tools of the trade, $40,000 of equity (meaning non mortgaged value) in a house, $1,000 in the bank account, IRAs/401 Ks,$7,000 of value in a vehicle (again, the portion of the vehicle not covered by a loan), one rifle and one shot gun, and $7,000 of value in household goods.

Any assets over that amount (for example, campers, atvs, snowmobiles) may be taken by the trustee and sold. The proceeds from the sale are then split between the trustee (who takes 25%) and all of the creditors of the debtor. This usually results in pennies on the dollar owed.

Chapter 13 is also known as the "wage earners plan." In a Chapter 13 bankruptcy case, the debtor has income and develops a plan to repay all or part of the debt over three to five years. During this time, creditors may undertake collection efforts.

When a chapter 13 is filed, a plan is filed with it . This plan is a detailed description of how to pay creditors' claims using future earnings over  3 to 5 years. The payments start with in 30 days of filing even if the plan is not yet approved. Chapter 13 is a reorganization of debt and a court supervised attempt (the plan) to pay debts of the debtor over time.  In a Chapter 13 case, some debts can be reorganized, sometimes against the creditors wishes and creditors are placed in different classes, who are paid differently under the plan.

You can have more assets in a Chapter 13, but they are less likely to be successful and are far more expensive than a  Chapter 7.

Many plans fail and are shipped to Chapter 7 because the debtors get divorced, lose their income or have other events happen in that 3-5 year plan period.

A chapter 12 bankruptcy is a form of Chapter 13 bankruptcy with special farm provisions.

It enables farmers to propose and carry out a plan to repay all or part of their debts. Under chapter 12 just like chapter 13, debtors propose a repayment plan to make installments to creditors over three to five years, with five being the max and three being the preferred.

Chapter 12 is more streamlined, less complicated, and less expensive than chapter 11, which is aimed towards large corporate reorganizations and few farmers find chapter 13 to be a good fit because it is designed for those who have smaller debts than a farm could be facing.  You cannot be forced to file a Chapter 12 proceeding, like you can be in Chapter 7, 11, and 13.

Farmers eligible are either (1) an individual or individual and spouse and (2) a corporation or partnership.  Individuals must meet each of the following four tests.

Chapter 12 contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court orders it, a creditor may not  collect a "consumer debt" from any individual who is also owes a debt jointly with the debtor. Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose.