It is tough to say, yet sometimes filing for bankruptcy is the best option for farmers who are unable keep up with their debt payments.

Farmers may file for bankruptcy under Chapters 7, 11 or 13 of the Bankruptcy Code. However, Chapter 12 bankruptcy may be the best option, because it is specifically designed for ongoing farm operations. Always seek qualified legal counsel when considering filing for bankruptcy.

To qualify for Chapter 12 bankruptcy:

• The farmer must show he or she has a regular annual income.

• Debt must not exceed $4,153,150.

• At least 50% of the debt, excluding loans for the home, must be attributed to the farming operation.

• More than 50% of the farmer’s income must be earned through the farm operation.

Also, if the farm is a partnership or corporation, then a single family or their extended family must own more than 50% of the entity; the family must operate the farm; 80% of the assets must be part of the farm operation; and the entity’s stock cannot be publicly traded.

The goal of Chapter 12 bankruptcy is to establish a plan for paying the creditors over a period of three to five years while allowing the farmer to continue the operation. The farmer will file a plan with the bankruptcy court listing all the priority, secured and unsecured creditors. Under the plan the farmer must show:

• The priority creditors are paid in full.

• The secured creditors are paid an amount at least equal to the value of the property securing the debt.

The unsecured creditors do not need to be paid in full. However, the plan must show that all of the farmer’s projected disposable income is paid to the debts over the three- to five-year term, and it must show that the unsecured creditors will receive at least an amount equal to what they would have if the assets were liquidated in a Chapter 7 bankruptcy.

The court will review the plan, and the creditors will have the opportunity to review and object to the plan. Often, the creditors will argue that all the disposable income is not being used for the payment of debt, or that they will receive less than they would receive if the assets were liquidated in a Chapter 7 bankruptcy. After reviewing the plan and hearing any objections, the court will then decide whether to approve the plan. If the plan is not approved, the farmer may revise the plan or file under Chapter 7 and liquidate assets.

Balzarini is an attorney at law with Miller Legal Strategic Planning Centers P.A. Contact him at [email protected].