Chapter 12

What is it and how can it help Family Farmers?

The federal Bankruptcy Code contains special provisions to assist family farmers and fishermen facing financial distress and seeking a means to reorganize the business into a viable agricultural operation. Chapter 12 plans allow financially distressed farmers to create a plan which will allow the farmer to stay in business while restructuring existing debt. The process presumes that all or part of existing debts will be repaid pursuant to an approved plan confirmed by the bankruptcy court. The limit for a Chapter 12 estate is $10 million.

Chapter 12 is designed to be a streamlined, efficient process which is easier to craft than bankruptcy plans created under other chapters of the Bankruptcy Code. To be eligible, a farmer must have at least 50% of their income and debts related to their farm operations. Each plan requires that the annual projected farm income is sufficient to allow the farm debtor to make the payments presumed in the plan.

The law contains strict requirements that debtors receive credit counseling prior to and during the pendency of the Chapter 12 process.

To begin, the farm debtor will file a Chapter 12 petition with the Bankruptcy Court. Filing of the petition, along with current financial and other information, has the effect of staying all pending creditor actions. Creditors are given notice that a petition has been filed and are advised that all collection actions against the farmer are suspended. Three to four weeks after filing the petition, a meeting is held with the local, court-appointed bankruptcy trustee. At this meeting, the farm debtor is required under oath to answer questions from the trustee and creditors. The debtor is required to appear at such meeting and will be accompanied by his or her attorney.

Next, the debtor is required to file plan for repayment, generally within 90 days of initially filing the petition. The plan will outline the repayments for priority claims and secured and unsecured debts. It must also make a showing that the repayments contemplated for unsecured creditors under the plan would be equal to or more than if the debtor were liquidating assets under a Chapter 7 plan. A Chapter 12 plan will generally be for a three to five year period. Priority claims – typically taxes and the cost of the Chapter 12 proceeding – must be paid in full. Secured creditors must be paid at least the value of the collateral pledged for the debt and such debt can be paid over the original time period contemplated in the mortgage or promissory note. Unsecured creditors do not need to be paid in full so long as the disposable income projected under the plan is committed to payments, after allowing the debtor sufficient income to pay for living and other basic expenses.

Generally speaking, the bankruptcy trustee will distribute funds to creditors according to the confirmed plan. The debtor can, if permitted by the plan, make payments directly to secured creditors.

The farmer must have a reliable, realistic plan to modify or reform business operations in order for the Chapter 12 process to be successful. This might mean converting to organic farming or moving from a dairy to a beef operation. Ultimately, if the farmer completes his or her obligations under the plan, the farmer will receive a discharge, which releases the debtor from all debts considered in the plan.

Chapter 12 affords financially distressed farmers significant debt relief and the prospect of a new start. Bankruptcy should only be considered if other financial options are no longer viable. If after due consideration, the farmer concludes that Chapter 12 is the best option, the Law Offices of John J. Faso, P.C. is here to help.