New Law Makes Chapter 12 Bankruptcies Easier for Family Farmers to File.
In Hall, the U.S. Supreme Court recognized that Chapter 12 of the Bankruptcy Code allows farmer debtors with regular annual income to adjust their debts pursuant to a reorganization plan that must be approved by the bankruptcy court. Section 1222 of the Code requires such plans to provide for full payment of priority claims unless they fall within a statutory exception. Under Section 1222(a) (2)(A), tax claims arising from the gain on the disposition of farm assets can be stripped of priority status and downgraded to general, unsecured claims that are dischargeable after less than full payment. However, the Supreme Court held that exception applies only to claims "entitled to priority under 11 U.S.C. [section] 507]" in the first place, which would include "any tax ... incurred by the estate." (Emphasis added.) The court concluded that since Chapter 12 estates are not taxable entities, the exception for allowing capital gains taxes incurred post-petition to be treated as general unsecured claims did not apply. Therefore, the post-petition capital gains taxes were not dischargeable under a Chapter 12 plan.
In other words, prior to the enactment of this new law, if a family farmer sold land or equipment after a Chapter 12 case was filed with the goal of reducing his or her debt, the capital gains taxes resulting from such sales needed to be paid in full before payments could be made to other unsecured creditors like the local feed store. This would frequently result in the dismissal of the bankruptcy case and further liquidation of the farmer's assets to pay the tax bill.
In order to avoid this result, farmers had to sell land or equipment before filing for bankruptcy in order to have the capital gains taxes paid, along with other general unsecured creditors. This would result in debtors engaging in delaying tactics to slow down foreclosures and collection lawsuits with the result that by the time the farmers were able to file for bankruptcy protection, their financial condition had deteriorated even more. The new legislation will enable farmers to downsize in a bankruptcy rather than risk complete liquidation, and will make it much easier for them to time the filing of their bankruptcies.
It is often beneficial for both creditors and debtors for a bankruptcy to be filed sooner rather than later. If debtors attempt to sell real estate or equipment out of the ordinary course of business after a Chapter 12 case is filed, they must first obtain permission from the bankruptcy court to do so. "Such sales should prove to be quicker, cheaper and more transparent since they will now be under court supervision," according to Ed Nazar, of Wichita, Kansas, who served as a Chapter 12 trustee for more than 25 years.
The new law amends Section 1232 of the Code by stating a claim by a governmental unit based upon the disposition of property used in a farming operation (i.e., a capital gains tax arising from the sale of farm land or equipment) that arises either before the filing of the bankruptcy petition, or after the filing of the petition and before the debtor's discharge (which occurs after all plan payments are made), shall be treated as an unsecured claim arising before the date on which the bankruptcy petition is filed, and shall not be given administrative expense priority under Section 507.
The amendments apply to any Chapter 12 case filed after Oct. 26, 2017. If a case had been filed as of that date, the changes only apply to those cases where a plan was not confirmed as of Oct. 26, 2017, and for which an order of discharge under Section 1228 had not been entered.
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|Date:||Jan 1, 2018|
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