What Happens If You Have a Farm & Go Bankrupt?
Congress recognizes the unique characteristics of farming. Farming is a capital-intensive business with narrow profit margins, and many farmers rely on the use of debt to finance their operations between planting and harvest. Bankruptcy law allows debtors to discharge debts in an orderly fashion when the situation becomes hopeless, or allows for a reorganization of finances to allow a farm or business continue operating while it pays off debts under court supervision.
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Types of Bankruptcy
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Bankruptcy law is outlined in Title 11 of the United States Code. There are six chapters that provide for either the liquidation or reorganization of businesses and individuals. The most commonly used include Chapter 7, for total liquidation of individuals or businesses. Chapter 11 is primarily for businesses, but occasionally is used to govern large personal bankruptcy. Chapter 12 provides special provisions for farmers and fishermen. Chapter 13 allows individuals to reorganize and repay debts under a court supervised plan.
Chapter 12
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Chapter 12 of the U.S. Bankruptcy Code provides for more generous exemption limit allowances for farmers and fishermen than are otherwise allowable under business bankruptcies. This is because Congress realizes that you need to earn a living, and in order to continue earning a living as a farmer or as a fisherman, you will need some land or a boat. Chapter 12 is only available to farmers who can demonstrate a regular source of income. Total debt must not exceed $3,792,650 to qualify for bankruptcy under Chapter 12.
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Process
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Generally, you begin the bankruptcy process by fulfilling the requirements listed on Form B 200 with the closest Federal Bankruptcy Court, along with a number of supporting documents, including Voluntary Petition Form B1 (Official Form 1), statement of assets and liabilities, a statement of income, a statement of financial circumstances and a schedule of contracts and leases. You will also need to pay a filing fee of between $239 and $1,000, depending on the version you use to file. You can find both Forms B 200 and Voluntary Petition Form B1 in the Resources section on this page.
Outcome
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The outcome of your bankruptcy will depend on your circumstances, on the specific provisions of law in the state where you have your farm, and whether your farm is an entity separate from your personal assets. If you have organized your farm as a corporation or a limited liability company, you may be able to shield your family and personal assets from collection under bankruptcy. However, if you are a sole proprietor or operate as a partnership, your personal assets are subject to the claims of creditors.
Considerations
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Bankruptcy can have significant long term effects. It can damage your ability to get credit in the future -- which you may desperately need to fund your planting operations. Also, you can only declare bankruptcy once every 8 years. Do not declare bankruptcy as a short-term solution to a permanent problem. The causes of your farm's unprofitability may not go away once you file bankruptcy.
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