Farmers are special in many ways. John F. Kennedy said, “The farmer is the only man in our economy who has to buy everything he buys at retail—sell everything he sells at wholesale—and pay the freight both ways.” Farmers form the foundation of our nation’s food supply.
In recognition of their unique place in our economy (and of their lobbying prowess), farmers have access to specialized tools in bankruptcy that no other debtors have. This starts with Chapter 12 of the Bankruptcy Code.
Why Chapter 12?
In legal parlance, “chapter” is a shorthand way of referring to a bankruptcy filed under that specific chapter of the Bankruptcy Code. Individuals usually file Chapter 7 (liquidation) or Chapter 13 (repayment plan) bankruptcies.
While businesses can liquidate through Chapter 7, they most often reorganize through Chapter 11 bankruptcies. Small businesses can take advantage of Chapter 11 Subchapter V bankruptcies. Chapter 15 bankruptcies are for international companies to file. And family farmers and family fishermen can file under Chapter 12.
Chapter 12 has the same basic thrust as other reorganization (Chapter 11 of all varieties) or repayment (Chapter 13) bankruptcies: Paying creditors fairly while allowing the business or individual to escape overwhelming debt loads and hopefully continue being productive members of society. However, Chapter 12—particularly for family farmers—gives overwhelmed debtor options unavailable in other bankruptcy chapters.
A full list of these differences is the topic of an hour-long continuing legal education course for lawyers (Ag & Business Legal Strategies attorneys have taught courses like this), so we’ll focus on one near and dear to our hearts: Tax deprioritization.
Taking the Bite out of Taxes
Benjamin Franklin famously quipped, “In this world nothing can be said to be certain, except death and taxes.” In all chapters of bankruptcy, taxes are granted special “priority” status, meaning they get paid first in a liquidation and must be paid in full in a reorganization or repayment plan. If they are not paid, they are not discharged at the end of the bankruptcy. In contrast, non-priority “general” unsecured claims typically receive pennies on the dollar and are practically always discharged at the end of the case.
The problem is that in a typical farm Chapter 12, the debtor has sold or needs to sell farm property to right-size their operation so it is profitable—but those sale proceeds have to pay down the bank and other secured creditors, leaving no money to pay tax bills that are frequently massive. This can force farmers to liquidate instead of reorganizing.
Chapter 12 allows family farmers to turn the tables on the tax man. Under Chapter 12 a family farmer can treat the taxes from liquidated farm assets as general unsecured claims (and therefore typically to be paid pennies on the dollar) and discharge any unpaid taxes at the end of the bankruptcy. This can save a Chapter 12 family farm debtor tens or even hundreds of thousands of dollars.
How does Ag & Business Legal Strategies know so much about tax deprioritization for family farmers? We regularly file for clients under Chapter 12 and deprioritize their taxes—Ag & Business Legal Strategies filed the first case to use tax deprioritization, in fact, and we’ve helped family farmers deprioritize hundreds of thousands of dollars in taxes. We also often speak and write about Chapter 12 and tax deprioritization.
Most of all, our firm’s founder, Joe Peiffer, helped draft the tax deprioritization statutory language, twice—both originally and then again after the Supreme Court found the flaw he had identified in the original language.
Here to Help
At Ag & Business Legal Strategies we often describe Chapter 12 as the most powerful chapter in the Bankruptcy Code. Tax deprioritization, a high debt limit, and the ability to confirm a reorganization plan without having to persuade creditors to support it are just some of the reasons it deserves that distinction.
If you’re a struggling family farmer or know one, reach out to Ag & Business Legal Strategies today. We can help you evaluate your farm business as a whole and, if appropriate, help you file a Chapter 12 bankruptcy, right-size your operation, and deprioritize the taxes from those liquidations.
Contact us now—we can do so much more to assist you if we’re brought in early, rather than after everything is falling apart.
At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.
Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.
