Chapter 12 bankruptcy cases in Missouri and Kansas, which are specifically designed for farmers, have been increasing in number in recent years as more and more farmers have been struggling with their debts. Modern farming has become very dependent on access to credit and then being able to timely pay these debts. When a farmer has a bump in the road that inhibits their ability to pay their debts, it can often severely impact their ability to continue farming. Chapter 12 bankruptcy is designed specifically to provide debt relief to farmers in this situation. Our law firm has experience with these types of cases.
Since Chapter 12 cases are not widely written about, we thought it would be helpful to write an article discussing the basic features of Chapter 12, and what it can offer the family farmer, rancher, or fisherman.
Eligibility for Chapter 12 is limited to debtors who derive the majority of their income from farming or fishing operations. A debtor can be either an individual or a business. A certain percentage of debts (exclusive of debt for the debtor’s home) must be related to farming, ranching, or commercial fishing operations. This is at least 50% for a family farmer, and 80% if the debtor is a family fisherman; also, more than 50% of the debtor’s gross income must have come from the farming or fishing operation. When a case is filed, a Chapter 12 trustee is appointed whose role is to evaluate the case, act as a disbursing agent for payments, and make distributions to creditors. There is no “means test” requirement as in Chapter 7 or Chapter 13, nor is there a risk of asset liquidation.
Chapter 12 cases are, in some ways, a hybrid between Chapter 11 cases and Chapter 13 cases. They have features of both of these Chapters. Proofs of claims must be filed by creditors no later than 70 days after the bankruptcy petition is filed. A special automatic stay provision allows debtors to be protected from lawsuits, garnishments, repossessions, and foreclosures during the pendency of the case. Assets can be sold free and clear of liens.
A plan is normally filed within 90 days after the filing of the petition. In such a plan, the debtor proposes a certain treatment of his or her debts.For a Chapter 12 plan to be confirmed, it must meet the confirmation requirements specified in 11 U.S.C. §1225. A plan must be feasible, proposed in good faith, and provide for the payment of the debtor’s disposable income over the applicable commitment period. As in Chapter 13, a debtor in Chapter 12 receives a discharge of their debts after all plan payments have been completed at the end of the plan. The Court, however, may grant the debtor a “hardship discharge” if (1) the debtor’s failure to finish the plan payments is due to circumstances beyond the debtor’s control; (2) the unsecured creditors have received payments that equal or exceed what they would have received in a Chapter 7 liquidation, and (3) modification of the plan is not practicable.
Many family farmers or fisherman find themselves in difficult financial circumstances at the outset of Chapter 12 cases. Farming operations are often based on the extension of lines of credit. In many situations, it is to the debtor’s benefit at the beginning of a case for his attorney to contact the creditors, explain the situation in detail, and seek to work out negotiated resolutions that avoid the necessity of contested confirmation hearings. It also often happens that valuation of farm equipment and collateral can be an issue in Chapter 12 cases. Having access to an appraiser who can provide fair market values of such equipment and collateral can be of great benefit to a debtor.
One of the biggest advantages of Chapter 12 is the debtor’s ability to “cram down” secured debts to the value of collateral. In one of our recent cases, this alone saved a client hundreds of thousands of dollars. Real estate loans can also be “stretched out” over long periods of time, even 30 years. As in Chapter 11, creditors are generally reasonable and willing to resolve issues; but it is important for debtor’s counsel to take an active, persistent approach to resolve objections to plan confirmation. Plans do not confirm themselves.
All in all, Chapter 12 is an underappreciated and under-utilized chapter of the Bankruptcy Code. Some family farmers are not aware of the benefits that Chapter 12 can provide them in getting a fresh start. The Chapter was only created in the 1980s in the wake of the “savings and loan” crisis, and it did not become a permanent chapter until 2005. Filings under Chapter 12 are on the rise, however, and it seems that the coming years will witness an increasing reliance its provisions. It is “tailor-made” for farmers, and deserves to be more widely known.
If you are in Kansas or Missouri and would like to talk with an attorney, please give us a call at 913-385-9900. We have been helping people with their debts for over 20 years. We would be happy to set up a free, no-obligation consultation and help you explore all of your options. You have more power and control over your future than you might believe.