chapter 12 bankruptcy

Farming is a grueling profession.  Amazingly, before 1986, farmers did not have any special form of reorganization to recognize their unique contributions to the economy and their unreliable streams of income.  Fortunately, Chapter 12 provides family farmers (and family fishermen) with specially designed, more flexible 3-5 year payment plans to adjust debts and emerge in stronger financial shape.

In Chapter 12, a bankruptcy trustee is appointed to oversee your case and report to creditors.  The debtor (a farmer or a farming operation) is called a “debtor in possession” because he/she/it gets to retain all assets.  The trustee’s job is to accept your payments according to a court-approved plan and distribute money to creditors.  Trustees also act as gatekeepers to make sure plans comply with the Bankruptcy Code, our rules on how bankruptcies work. 

Chapter 12 debtors receive the benefit of the bankruptcy automatic stay, which prevents creditors from taking any actions to collect a debt – like repossessing property, garnishing wages, or forcing a debtor to appear in state court to defend a lawsuit – without court permission.  And since the stay lasts for the life of the bankruptcy, unless a creditor gets court approval to lift the stay, you can enjoy peace from your creditors for months at a time.  Once the bankruptcy is completed, a debtor will receive an order from the bankruptcy judge discharging all debts that can be eliminated.  Long-term debt like farm real estate and equipment debt will then be paid directly.

Why Chapter 12?

Our clients choose Chapter 12 cases for two main reasons:

(1) They are farmers and want to continue farming.  Often this land has been passed on through generations and they want to keep the land in the family name.  Unfortunately, a rough year or few years means there is not enough cash flow to service debt and allow the farming operation to thrive or survive.  Many are facing a threat of foreclosure of their land or repossession of equipment they need to farm.

(2) Our clients are willing to sell, but would face enormous tax consequences from doing so.  With farms that were purchased years ago or inherited, the “basis”, or starting point for tax calculations, is also low.  Selling now, while land is valuable, would mean a hefty tax bill and more money troubles.  However, Chapter 12 has unique rules that let some sales proceed while the gains are treated as unsecured debts – debts that can be discharged in the bankruptcy.  It’s a unique situation and if you are interested in doing so, you should speak with a qualified bankruptcy attorney and a tax professional.

All Chapter 12 individual clients have to complete a pre-fling and a post-filing online credit counseling course and everyone must appear once at a Meeting of Creditors required by the Bankruptcy Code.  There, our clients testify under oath about the accuracy of their bankruptcy paperwork and present proof of their identification and social security number to the bankruptcy trustee.  Creditors occasionally appear at these meetings because debtors are often months or even years late with payments by the time a bankruptcy begins. 

The goal at this stage is to obtain confirmation, or court approval, of your Chapter 12 plan.  Once the plan is confirmed, payments will be processed and money will be sent to your creditors with the goal of quietly finishing your Chapter 12 plan. And best of all, plans can be structured to pay annually, semi-annually, quarterly, or by some other method instead of the monthly payments required under Chapter 13.

Eligibility

Farmers have to demonstrate that they are eligible for Chapter 12 relief.  That means qualifying under debt limits (recently raised to $10 million in total debt) and also by showing they meet the bankruptcy definition of a “family farmer” and that the debts are suitable for a Chapter 12 reorganization.  Not every farmer can file for Chapter 12, so you should consult with a bankruptcy attorney familiar with Chapter 12 to determine if this option can help.