Farmers Facing Foreclosure May Experience ‘Double Whammy’
If you are a farmer facing foreclosure, you should know about Chapter 12 of the U.S. Bankruptcy Code. Also called a “Farm Bankruptcy,” Chapter 12 was created specifically for family farmers and is designed to provide flexibility because it takes into account the seasonal nature of the farming business. Chapter 12 bankruptcies also tend to be less expensive and less complex than Chapter 11 cases.
However, many farmers who face foreclosure have, unbeknownst to them, an additional financial time-bomb lurking in their future. Farmers who have acquired land over many years and have a low tax basis in the land, or those who have significant equipment that has been depreciated over the years, may face a nasty tax bill if they don’t consider relief under Chapter 12 of the Bankruptcy Code. Capital gains taxes can be the unexpected “double whammy” that farmers hadn’t considered if they are in financial distress. But relief under Chapter 12 may provide a solution.
Congress amended the Bankruptcy Code in 2005 and added a provision that allows farmers to discharge (i.e. not pay) a tax debt they would otherwise have to pay. The precise Bankruptcy Code section is 11 U.S.C. §1222(a)(2)(A). It provides:
The plan shall –
(2) provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507, unless –
(A) the claim is a claim owed to a governmental unit that arises as a result of the sale, transfer, exchange, or other disposition of any farm asset used in the debtor’s farming operation, in which case the claim shall be treated as an unsecured claim that is not entitled to priority under section 507, but the debt shall be treated in such manner only if the debtor receives a discharge; or . . . .
In 2012, the United States Supreme Court cleared up conflicting decisions around the country and determined that in order for the favorable tax treatment to apply, the sales of the farm assets must occur before the bankruptcy is filed, rather than while the bankruptcy is pending. See, Hall v. United States, 566 U.S. 506, 132 S. Ct. 1882, 182 L.Ed.2d 840 (2012). So, once the assets are sold, a farmer would need to file a Chapter 12 bankruptcy soon thereafter so they would still meet the definition of a “family farmer.” If they wait too long after a sale, they may not meet that definition and would lose their eligibility for relief under Chapter 12, and with it, their ability to take advantage of this important tax relief.
As the price of farm commodities continues to tumble, farmland is also decreasing in value, causing some farmers to be in default on loan covenants. This can, in turn, lead to bank pressures and sometimes foreclosures. As the farm foreclosures ramp up, farmers are well-advised to seek the guidance of experienced bankruptcy counsel to consider whether Chapter 12 relief is available to help them.