Legal Rights of Debtors and Creditors, Bankruptcy for Financially Distressed Farmers

Bankruptcy is a federal court procedure intended to benefit both debtors and creditors if a debtor is unable to pay all obligations. Filing bankruptcy' stops, or stays, all creditor's debt-collection procedures. The stay is to prevent some creditors from receiving more than their fair share from a financially distressed debtor. A bankruptcy trustee is usually appointed to assist in the fair distribution of the debtor's property. Equitable distribution of the debtor's property also is furthered by the trustee's avoidance powers, the debtor's exempt property, and the court's discharging the debtor from unpaid obligations. There are two basic types of bankruptcy proceedings--liquidation and reorganization. Chapter 7 liquidation provides for the sale of the debtor's primary assets, distribution of proceeds to creditors, and discharge of remaining unpaid debts. Then, except for property specified as exempt by North Dakota law, the assets of the debtor are sold and the proceeds distributed among the creditors. Subsequently, the debtor is discharged from most remaining debts and given the opportunity to financially "start fresh." Chapters 11, 12, and 13 of the Bankruptcy Code permit reorganization of the debtor's financial affairs and payment to creditors from the debtor's property and future income. A debtor is granted time to devise a plan of reorganization that may include rescheduling payments, selling some assets to reduce debt, forgiving debt, and implementing changes to increase the business' efficiency and profitability. Chapter 12 bankruptcy is intended to meet the unique problems encountered in reorganizing a farm business.