It's a simple equation. Drought plus farmer equals bankruptcy.
Bankruptcy pits the farmer against the creditor. Farmers have Colorado exemptions from foreclosure for certain collateral. The exemptions wipe out a portion of the security interest the farmer gives a creditor on those same items of collateral. The purpose is to allow the bankrupt some property for a "fresh start."
So creditors were stunned after Bankruptcy Judge Sid Brooks allowed husband and wife farmers, who had given items as collateral for a loan, to keep the first $25,000 each of livestock and equipment, and $10,000 each under a separate exemption for tools of trade.
Creditors contacted State Sen. Marilyn Musgrave (R-Ft. Morgan) to carry SB 42 that would limit agriculture exemptions in bankruptcy to $5,000. The way her bill was worded would also have wiped out the $10,000 separate exemption for farmer's tools of trade. Instead of farmers keeping $70,000 under the bankruptcy court decision, they would keep $10,000.
Her bill passed Senate Business Affairs Committee 4 to 3, but died on the Senate floor by "no action taken". Creditors immediately started pressuring Sen. Ed Perlmutter (D-Golden) and Rep. Matt Smith (R-Grand Junction). They had been the sponsors of SB 3 in 2000 which provided the $25,000 and $10,000 exemptions. Creditors wanted them to propose a compromise.
SB 219 was introduced April 22, and amended over and over again. The final version was prepared by Rep. Smith. It passed the House on the final day of the session and was approved back in the Senate with less than an hour to spare before the 2002 legislative session adjourned.
The Smith version allows a farmer husband and wife who take bankruptcy one exemption of $25,000 for the livestock and equipment and no separate exemption of $10,000 for tools of trade. As an alternative they can take $10,000 each for tools of trade and no $25,000 exemption allowed for farmers. Instead of $70,000, the new law allows $25,000 or $20,000.
Was SB 219 really necessary? A decision by a bankruptcy judge doesn't bind other bankruptcy judges, and no appeal by creditors was made to the U.S. District Court of Judge Brooks decision.
Creditors are still not happy with SB 219, especially since the new law provides it only applies to debts incurring on or after July 1st. So they have vowed to be back in 2003 and try to reduce the exemption even further.
In the meantime, after July 1st, a farmer can expect to hear from the bank and other creditors who will ask if the farmer could use another two or three thousand dollars. "If so, just come in and renew your pre-July 1st loan." The renewal gets around the July 1st deadline and reduces the exemption allowed under the prior law.
Is SB 219 constitutional? My personal opinion is "no". The law punishes a spouse of a farmer. The spouse might be a lawyer or accountant, or some other professional whose tools of trade include computers, business library, machines, supplies, etc. Just because the farmer is denied the $10,000 tools of trade exemption is no reason to deny the same to the non-farmer spouse.
Colorado's constitution, Article 18, Section 1 provides "The General Assembly shall pass liberal homestead and exemption laws." That was in the original constitution of 1876 when Colorado was strictly a rural state and farming was an essential occupation. I don't think the courts will view punishing a non-farmer spouse as a liberal approach to exemptions.
That means the issue will be back for consideration in the 2003 legislative session.
(Jerry Kopel served 22 years in the Colorado legislature.)
Copyright 2015 Jerry Kopel & David Kopel