~~As stress builds in the farm sector, care must be taken if the farmer is considering filing for Chapter 12 bankruptcy. This type of bankruptcy was specifically put into law to help farmers reorganize their debts and continue farming. One of the nice features for farmers is the ability for income taxes related to selling assets in the Chapter 12 bankruptcy to be treated as unsecured debts. This allows the farmer more flexibility in arranging their affairs to emerge from bankruptcy on a more sound basis.
However, Chapter 12 is only available if your total aggregate debt is less than an inflation adjusted limit (currently $4,153,150). Legislative effort has been made to increase this limit but has failed so far.
Roger McEowen on his Agricultural Law and Taxation Blog just posted on a recent Chapter 12 bankruptcy case that showed how this limit negatively affected a farmer. In this case, the total debt was about $500,000 higher than the limit and the bankruptcy got changed from a Chapter 12 to a Chapter 11 which does not have the more positive features of the Chapter 12. If the farmer had been able to appropriately consult with an advisor (if he was able to), he may have been able to sell some assets to get his debt under the threshold or made other changes. Many times, a little effort is all that is needed to comply with all of the rules. Even though the rules might seem out of date; they still must be followed. In this farmer's case, not following the rules cost him.