Bankruptcy: Chapter 12

"Prior to 1986, most farms, including those owned by individuals, corporations and partnerships, that needed to file bankruptcy were required to do so under Chapter 11. This occasionally proved difficult because farmland had lost so much of its value in the 1980's that farmers were simply unable to propose a feasible reorganization plan. However, in 1986, Congress enacted the Family Farmer Bankruptcy Act, which had the effect of "creating" Chapter 12 of the Bankruptcy Code.

"Chapter 12 was written specifically for farmers, but there are certain technical limitations as to who can qualify. Currently, Chapter 12 is available to person (including certain corporations and partnerships) who meets the definition of "family farmer with regular annual income." Under this definition a debtor must be "engaged" in a farming operation, and must meet a "farm debt" test and either a "farm income" or "farm assets" test, which generally requires that the debtor obtain fifty percent of its gross income from farming. A corporation or partnership farming operation can seek Chapter 12 relief if it is controlled by a single family and otherwise meets Chapter 12 requirements. For both individuals and corporations and partnerships, a maximum $1,500,000.00 debt ceiling is imposed; that means that any debtor with debts exceeding that amount – including contingent or unliquidated debts – cannot seek Chapter 12 relief and must file under some Chapter 11.

"The basic structure of a Chapter 12 case usually begins with the debtor maintaining possession of the farm property and continuing the farming operation. In all cases, a Chapter 12 Trustee is appointed to oversee the case. The Trustee does not operate the farm unless the debtor is removed from the operation by the Bankruptcy Court, but the debtor is obligated to provide the Trustee periodic accounting information, such as income and disbursements, the payment of taxes, and similar items. The debtor is also allowed to obtain credit, continue leasing land and equipment, and otherwise operate the business normally, but the debtor has to seek the approval of the Bankruptcy Court for certain of these actions. Chapter 12 debtors must also file a "plan" for the adjustment of their debts. This plan must be filed within 90 days from the time the petition is filed, and will be subject to confirmation by the court within 45 days of the time the plan is filed.

"The plan can restructure both secured and unsecured obligations; for example, secured claims can often be treated such that they are paid over a longer period of time, and perhaps at a different interest rate. In order for the plan to be confirmed, it must comply with all applicable provisions of the Bankruptcy Code, must be proposed in good faith, and must provide that each holder of a claim (i.e., creditor) receive property or money under the plan that has a present value not less than what that creditor would receive under a Chapter 7 liquidation. This means that claims can be paid over time, but must include interest. If a secured creditor or Trustee object to the plan, the court must determine if all of the Bankruptcy Code requirements are satisfied. If so, the plan can be confirmed. Generally, it is easier to confirm a plan in Chapter 12 than it is in Chapter 11, and for this reason we will usually recommend that our clients file a Chapter 12 if they meet the requirements. After confirmation, the debtor continues its operations, but must make all payments required by its plan and provide periodic accounting information to the Trustee."

  Chapter 11
THS Law Journal article

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