Update: On October 26, 2017, President Trump signed this bill into law.
On October 24, 2017, The Family Farmer Bankruptcy Clarification Act of 2017, received final Congressional approval and was sent to the President for his signature. This provision was part of a larger bill, the H.R.2266 - Additional Supplemental Appropriations for Disaster Relief Requirements Act, 2017, including the Bankruptcy Judgeship Act of 2017. The Bankruptcy Judgeship Act allows for the appointment of new bankruptcy judges in certain regions and modifies some fee provisions. Senators Grassley and Franken also included in this Act, Section 1005, titled “Clarification of rule allowing discharge to governmental claims arising from the disposition of farm assets under chapter 12 bankruptcies.” This provision, also called the Family Farmer Bankruptcy Clarification Act of 2017 is intended to assist struggling farmers by providing them with more options for reorganization through a Chapter 12 bankruptcy.
Section 1005 reverses Hall v. U.S., 132 S. Ct. 1882 (2012), a 5-4 decision which interpreted current law to make it nearly impossible for farmers to discharge in a Chapter 12 bankruptcy capital gains tax arising due to the sale of property after the filing of a bankruptcy petition. Rather, Hall declared that taxes incurred due to the sale of farm assets used in the debtor’s farming operation could be treated as unsecured claims only if the sale occurred in the tax year prior to the filing of the bankruptcy petition. This meant that many farmers could not reorganize their operation by selling assets to “right-size” the business after the bankruptcy action began. And liquidating assets before the filing was often unworkable.
The text of Section 1005 reads as follows:
§ 1232. Claim by a governmental unit based on the disposition of property used in a farming operation
(a) Any unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor’s discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor’s farming operation—
(1) shall be treated as an unsecured claim arising before the date on which the petition is filed;
(2) shall not be entitled to priority under section 507;
(3) shall be provided for under a plan; and
(4) shall be discharged in accordance with section 1228.
Senator Grassley has made multiple attempts to “fix” what he has characterized as Hall’s misinterpretation of original Congressional intent. The President's signature on this bill enacts this fix.
This law will make Chapter 12 a better tool for a number of debtors. Still, many are precluded from using Chapter 12 because the debt limit, although adjusted for inflation, has not kept pace with current asset values. It is currently set at $4,153,150. Some farmers just above the limit may be able to file a Chapter 12 by selling assets to reduce some debt before filing.
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