Mike has covered the topic well. I think he made one error though, fully depreciated equipment is subject to depreciation recapture rules and would be considered "ordinary" income" subject to regular income tax - not capital gains.
A simple example. You have a tractor you paid $10,000 for in 1991. Its fully depreciated so it has a book value of "$0". The bank takes it to cover a $13,000 loan. The tractor sells for $12,000 at auction. The farmer has $10,000 of depreciation recapture also called section 1031 - taxed at 25%. He has a $2,000 capital gain (currently taxed at 10%) and he has a $1000 of dept forgiveness - taxed at regular rates.
You'll be subject to all taxes unless debt is discharged though bankruptcy.
Last word of advice - NEVER USE A LAWYER FOR TAX ADVICE!!!!!! I've seen more estates and bsinesses screwed up because of lawyers then I ever dreamed possible.
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Today's Featured Article - Women and Tractors - More Views From the Farmer's Wife - by Teri Burkholder. The top ten reasons why the judges wouldn't let you participate in the stock antique tractor pull: Hey, this is stock! It came with that V8 in it! That "R" on my tires stands for "really old" not radial! Blue gas? We thought it was a pretty color! What wire hooked to my throttle?
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