Chapter 12 Bankruptcy

In the mid-1980’s, farmers throughout the United States faced seemingly insurmountable credit problems. Struggling family farmers were seeing their property and equipment placed on the auction block. In order to protect distressed family farms, Congress added Chapter 12 to the Bankruptcy Code in 1986. In 2003, about 700 family farmers sought the protection offered by a Chapter 12 bankruptcy.

What is “Chapter 12?”

Chapter 12 is a part of a federal law called the Bankruptcy Code. Debtors and the United States Bankruptcy Courts must follow its provisions. Each Chapter applies to a different type of debtor. For example, Chapter 13 applies to consumers or individual debtors, with regular income who want to repay their debts under a bankruptcy plan. Chapter 12 applies to certain family farmers.

The purpose of Chapter 12 is to give financially distressed family farmers a chance to reorganize and repay their debts, without having to sell their farms and equipment. Proponents of Chapter 12 say that it provides a safety net or necessary security to family farmers who are faced with bankruptcy.

Congress enacted Chapter 12 so that family farmers would not have to use other bankruptcy alternatives, such as Chapter 7. A Chapter 7 debtor must sell much of his or her property in order to repay creditors. Obviously, if a farmer had to sell his or her equipment or land, it would be difficult, if not impossible, to create future income from farming. Because a Chapter 12 debtor can keep property and equipment, he or she can continue to operate the farm. Furthermore, the requirements and costs associated with a Chapter 12 proceeding are not as burdensome as those in, for example, a Chapter 11 proceeding by which a business can reorganize. Due to the seasonal nature of farming operations and the need to act quickly, the timeframe for a Chapter 12 proceeding is often significantly less than that in other types of proceedings.

Who is eligible to file a Chapter 12 bankruptcy?

A family farmer with regular income from farming can seek the protection of the special provisions of Chapter 12 of the Bankruptcy Code. The individual or a married couple must be engaged in farming operations. At least one half (or 50 percent) of the individual or the farming couple’s gross income in the prior year must have come from the farming operations. Additionally, the total debts of the farmer or the farming couple cannot exceed a specified amount; as of 2003, that amount was $1.5 million.

A partnership or a corporation can qualify as a “family farm” if similar requirements of Chapter 12 are met.

What Input Do the Creditors of A Chapter 12 Family Farmer Have?

Unlike in proceedings under other Chapters of the Bankruptcy Code when a debtor files for protection under Chapter 12, a family farmer can file a “reorganization plan” without input from creditors. Additionally, Chapter 12 permits a family farmer to sell, without approval from creditors, farm property or equipment that is free from liens.

Is Chapter 12 a Permanent Provision of The Bankruptcy Code?

When Chapter 12 was enacted in 1986, it was scheduled to expire periodically. Since that time, Chapter 12 was temporarily extended a number of times. In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Chapter 12 was reenacted without a “sunset” provision. Therefore, it is now a permanent provision of the Bankruptcy Act.

Chapter 12 provides that a standing trustee will be appointed in each case, but in the ordinary course, actual operation of the farm will remain with the debtor. Additionally, the debtor, as debtor in possession, has all rights, responsibilities, and powers, as would a debtor in possession under Chapter 11. Chapter 12 does not provide for the appointment of creditors’ committees.

Chapter 12 Debtor Powers

The Chapter 12 debtor is given broad authority to operate the farm business. The debtor may convert his or her case to a case under Chapter 7 at any time. The debtor pays the Chapter 12 trustee. In addition to the plan payments, the debtor must pay 10 percent of all such payments to the trustee. This payment must be made at the time of the plan payment. After payments under the plan have totaled a certain sum, the trustee payment is reduced. On request of a party in interest and after notice and a hearing, the court may dismiss a case for cause. Cause includes fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor, either before or after the commencement of the case.

Chapter 12 Trustee Powers

Chapter 12 requires that a trustee be appointed. Except as otherwise provided in the plan, the trustee makes all payments under the plan. Although the farmer remains in control of the property, the trustee maintains important functions. Where fraud or gross mismanagement on the part of the debtor is shown, a creditor or the trustee may move to have the trustee placed in control of the farm. Under Chapter 12 the trustee is directed to do the following:

  • receive and be accountable for property and payments turned over by the debtor;
  • object to the allowance of improper claims;
  • make recommendations regarding the discharge of the debtor;
  • provide information to interested parties;
  • investigate the financial affairs of the debtor for cause;
  • investigate the operation of the farm and analyze the feasibility of continuing the business;
  • participate in valuation and confirmation hearings;
  • ensure that the debtor makes timely payments under the confirmed plan; and
  • appear and be heard at any valuation hearing, confirmation or modification hearing, or any hearing involving the sale of property of the estate.

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