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Around the County

Bankruptcy: the last resort

July 10, 2009
By Wayne Schoper, Brown/Nicollet Extension Educator

As it happens sometimes, life can deal difficult times. We have seen this in the general economy and, especially during the 1980's, in the agricultural economy. When a farm operator, or any other business person, is unable to service all of the indebtedness associated with their business, he or she may face substantial pressure from creditors. This pressure eventually may take the form of legal action. One way that a farmer can respond to the pressure of creditors is to seek the protection of the Bankruptcy Code. Choosing this route is a very serious decision and can carry severe consequences.

However, farmers should understand bankruptcy procedures and their rights as a debtor during bankruptcy proceedings. Philip Kunkel, Jeffery Peterson, Jessica Mitchell are attorneys with the Gray Plant Moody law firm out of Minneapolis. They had the following thoughts regarding bankruptcy in the agricultural arena.

Effect of Bankruptcy

Article Photos

Wayne Schoper

Choosing the bankruptcy route is serious business and should be considered as a last resort. While the Bankruptcy Code may help alleviate your debt, the choice has other adverse effects.

First of all, bankruptcy petitions are public information and may be published in local newspapers. Many people feel uncomfortable with their private financial difficulties being exposed to the general public. Filing bankruptcy will also be reported to most major credit bureaus.

Second, you and your financial affairs will be subject to scrutiny by your creditors and the Bankruptcy Court. Many financial decisions will require the approval of the Court.

Finally, particularly when filing for protection under Chapter 7, the farmer may have to bear the loss of many of the assets of the farm. In this case, it will be increasingly difficult to continue farming or return to farming in the future.

Alternatives to bankruptcy

Because bankruptcy should only be considered as a last resort, a farmer should first look at possible alternatives available to debtors that do not result in a bankruptcy petition. In this case, a voluntary workout may be a viable option. Many farmers prefer to negotiate an arrangement with creditors to restructure their debts or to repay them on terms different from what is specified in their various loan agreements. This type of informal workout may permit a farmer to continue operating their farm while insuring that his creditors are paid. Such agreements are perhaps most common in situations in which the debtor's financial distress is temporary.

A workout may involve reamortizing existing indebtedness over a longer period of time; temporary arrangements to defer payment of principal; or the reduction of the interest rate charged by a creditor. In addition, such arrangements may require the borrower to provide the lender additional collateral to secure the loan or otherwise provide the lender with additional credit enhancements. Workout arrangements, however, rarely resolve a current financial situation in a manner that is satisfactory to all parties. For one thing, such arrangements are voluntary.

If the situation is serious enough, and bankruptcy is the only alternative, Chapter 12 was added to the Bankruptcy Code in 1986 to directly address the reorganization of family farms. Chapter 12 bankruptcy is only available to persons who meet the definition of "family farm" set forth in the statute. Several tests must be met in order to qualify as a family farmer. First of all, the debt cannot exceed $3,544,525 and fifty percent of this debt must come from the farming operation. The definition of farming in the statute is "farming to include tillage of the soil, dairy farming, ranching, production or raising of crops, poultry or other livestock products in an unmanufactured state." For the purposes of computing the debt ceiling, any debt on a homestead will not be included unless it was granted in connection with the farm operation. In any case, a consultation with an agricultural attorney is recommended when making these kinds of decisions.



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