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Attorney Joey D. Schmidt
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Phone: 405-329-5777       Fax: 405-329-3841
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Bankruptcy: an overview

Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated to resolve his or her debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full.

Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to "establish. . . uniform laws on the subject of Bankruptcy throughout the United States." See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. See Debtor-Creditor. A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.

Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These courts are a part of the District Courts of The United States. The United States Trustees were established by Congress to handle many of the supervisory and administrative duties of bankruptcy proceedings. Proceedings in bankruptcy courts are governed by the Bankruptcy Rules which were promulgated by the Supreme Court under the authority of Congress.

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy proceedings under Chapters 11, 12, and 13 involves the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. Under Chapter 7, 12, 13, and some 11 proceedings, a trustee is appointed to supervise the assets of the debtor. A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors. After a bankruptcy proceeding is filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors' interests.

 

Farm Bankruptcy in Oklahoma

Introduction

Bankruptcy is rarely, if ever, the first choice of farm families facing financial difficulty. But many Oklahoma farmers have used the provisions of federal bankruptcy law to reorganize their farm finances and continue to farm or to leave farming with a cleaner slate than might otherwise be possible. No other legal tool has proven as useful in helping financially struggling farmers, since even many negotiated settlements and government debt restructuring programs are based on the concepts and procedures found in bankruptcy law. It’s therefore one of the first alternatives a farm family should consider and review with an attorney when facing financial problems.

This brief description of bankruptcy practice in Oklahoma is designed as a general introduction and is not intended to provide specific legal advice. It’s vital that any farm family facing financial problems seek help from an experienced bankruptcy attorney before taking action.

 Impact of bankruptcy on credit

One of the most common questions people have about bankruptcy is “what impact will it have on my credit?” The only absolute answer to that question is that a bankruptcy filing will be noted on a person’s credit report for ten years. Beyond that there are no specific rules. Some lenders will consider the bankruptcy to be an example of a person’s inability to be trusted to repay debts. Other lenders may see a bankruptcy as a “fresh start” that  leaves a person with a clean slate of no debts but possibly some assets to use as collateral. Much of the impact will thus depend on a person’s past credit history beyond the bankruptcy, their personal relationship with the lender, and their present and future income and assets.

Oklahoma bankruptcy exemptions

Bankruptcy law allows debtors to “exempt” certain assets from collection by  a creditor. The use of these exemptions and the reaffirmation of some debts may allow a farmer to keep farming. In Oklahoma each debtor may exempt (check with Attorney for details): 

1.         The Principal Residence of Debtor (and 160 Acres if qualify)

2.        Mobile Home if principal residence of Debtor.

3.        Household Goods and Furniture.

4.        Cemetary lot of Debtor.

5.        Implements of Husbandry, toos, apparatus and books for trade or profession, not to exceed $10,000.

6.        Books, Portraits and Pictures.

7.        Wearing Apparel, not to exceed $4000.

8.        Wedding rings, not to exceed $3000

9.        Health aids

10.     Five milk cows.

11.     One hundred Chickens.

12.         Two horses with bridles and saddles.

13.        One Motor Vehicle, not to exceed $7500.

14.        Guns, not to exceed $2000.

15.        Ten hogs.

16.        Twenty head of sheep.

17.        Provisions and forage for feeding exempt stock.

18.        75% of Current wages for the last 90 days.

19.        Alimony, Support, Separate Maintenance, Child Support. up to $3000

20.        Retirement plans.

21.     Interest in Personal Bodily Injury, Death or worker's compensation claim, not to exceed $50,000.

22.     Individual Development Accounts.

23.     Federal Earned Income Tax Credit.

24.     Oklahoma College Savings Plan.

 Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common type of bankruptcy and probably the one most people think of when considering the consequences of filing bankruptcy. Chapter 7 is the least expensive form of bankruptcy and the quickest. In it, debtors agree to liquidate all assets that aren’t exempt or, if used as security for a loan, they wish to keep by reaffirming the debt and continuing to make payments. Chapter 7 is used most often by farmers who wish to discharge all debts and  are willing to liquidate assets because they are leaving farming. After a Chapter 7 is filed, a trustee is appointed to review the debtor’s statement of assets and liabilities and make a determination on whether any equity is available for unsecured creditors. After this review is made, secured creditors are allowed to pursue liquidation of any assets they have as collateral and unsecured creditors share in any remaining equity.

One of the most important aspects of any type of bankruptcy is that when it is filed, all actions by creditors to collect a debt must be stopped. This “automatic stay” can only be lifted by order of the court. This automatic stay can be critical to stopping a foreclosure or other debt collection proceeding until a farmer decides how to proceed.

 Chapter 11 Bankruptcy

Chapter 11 is another type of “reorganization” bankruptcy, typically used by larger businesses and farms not eligible for Chapter 12. Chapter 11 has proven difficult for many farmers because of the requirement that both secured an unsecured creditors be allowed to vote on whether to accept or reject a plan of reorganization. Typically, creditors are put into “classes” of claims, depending on whether they are secured or unsecured and whether they have priority over other claims, e.g. tax claims. A class of claims is deemed to have accepted the plan if creditors holding at least two-thirds of the amount of the total claims and more than one-half of the number of total claims votes to accept the plan. If there are impaired claims, meaning they will not be fully repaid, the plan cannot be confirmed unless at least one class of impaired claims votes to accept the plan.

For the first 120 days after a bankruptcy is filed, debtors have the exclusive right to submit a proposed plan. They have an additional 60 days in which to try to get the plan accepted by creditors. If no plan has been accepted after 180 days, creditors may submit their own plan, which is likely to include significant liquidation of assets.

Besides the procedure for obtaining confirmation of a plan, many other aspects of Chapter 11 are similar to those of Chapter 12 or 13, such as the use of cash collateral, obtaining of secured debt, and operation of the farm in the ordinary course of business.  However, because of the complex rules governing confirmation of a plan, Chapter 11 has often been more costly and less successful than Chapter 12.

Chapter 12 Bankruptcy

Originally adopted in 1986, Chapter 12 is one of the most “pro-farmer” laws created by Congress. It allows farmers to restructure their loans, perhaps by changing interest rates, stretching out the term of the loans, or writing off unsecured debt. While Chapter 12 has expired and been extended several times over the last ten years, a bill now in Congress would make Chapter 12 a permanent part of the law, raise the debt limitations, and address capital gains tax problems when selling farm assets.

Eligibility

Chapter 12 is available to farmers with debts less than $1.5 million (80% of which arose from the farming operation) and who received 50% of his or her gross income in the previous year from farming. If the debtor is a corporation, 50% of the stock must be held by members of a family; more than 80% of the corporate assets must be used in the farming operation; and debts must not exceed $1.5 million (80% of which arose from the farming operation). Chapter 12 debtors must be engaged in a “farming operation,” which would encompass the typical Nebraska crop/livestock farm but also has been ruled by some courts to include activities like game farms, fish hatcheries, cash rent, and timber harvesting

A Chapter 12 Bankruptcy “Plan”

A debtor’s reorganization plan must be filed within 90 days after the bankruptcy is filed. In general, the plan proposed must provide all creditors with the same amount of money the would receive in a Chapter 7 or “liquidation” bankruptcy. After determining how much a secured creditor would receive if its collateral was liquidated, a farmer’s Chapter 12 plan has to propose to pay that same amount over a period of years. The amount to be paid a secured creditor may be less then the current debt if there is insufficient collateral. It may also be paid over a longer period of time and at a lower interest rate, depending on what the current loan terms require. If a creditor is fully secured, no write-down of debt is usually possible. The most that might be done is to restructure the loan with a longer amortization or a lower interest rate. This may be all that’s needed to help a farmer stay in business though. Property taxes and recent income tax obligations have to be paid in full. Unsecured creditors often are paid little or nothing but may receive payments if a farmer has “disposable income.”

Feasibility of a chapter 12 plan

Key to the success of a Chapter 12 bankruptcy plan is the ability of the farmer to “cash flow” the restructured loan terms. Even with a write-down of debt and reamortized loan terms, a farmer in Chapter 12 must still be able to show repayment of debts, often leveraged at 100% of equity. It’s important to have either historical data supporting the proposed income and expenditures or good justification for departing from it. Prior years tax returns will have to be presented to show whether the proposed plan is supported by past income and expense history.

Special bankruptcy provisions allow farmers to cut off the liens of lenders so that new financing can be obtained for operating purposes.  That new lien will have priority if the bankruptcy is filed before the crop is planted. A farmer under a Chapter 12 plan might also have more freedom to use cash collateral (crops, livestock, milk) to pay operating and living expenses than if dealing with a lender outside bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed to help reorganize debts. It’s only available to individuals (not corporations) with less than $290,525 in unsecured debt and $871,550 in secured debt (adjusted periodically for inflation). Over a 3-5 year period debtors make payments to a trustee who disburses the funds to unsecured creditors. Secured creditors may also be paid by the trustee or directly by the debtor. The plan may classify claims so that one group of claims is treated differently, although similarly situated claims must be classed together. Because of the debt ceilings and limitations on modifying secured debt beyond the 3-5 year plan period, Chapter 13 has not proven as useful for farmers as Chapter 12. Chapter 13 is often used to “cure” defaults on residential mortgages. Some farmers with smaller debt and the right type of secured debt may be able to use Chapter 13 when Chapter 12 is unavailable or too costly.

 

Bankruptcy is not a perfect solution for every farmer experiencing financial difficulty, but it can be a very effective tool for farmers unable to get their lenders to voluntarily restructure loans or to make concessions that would be required in a bankruptcy proceeding. Oklahoma farm families facing financial problems should talk with an experienced farm bankruptcy attorney before agreeing to liquidate assets or otherwise make promises to their lenders.