The Law Offices of Ken McCartney P.C.

PT Chapter 12

 

Home
PT Chapter 13

AGRICULTURE

1. WHAT SHOULD I KNOW ABOUT CHAPTER 12?

It is a permanent form of relief, thanks to BAPCPAof 2005. If you earned more than half your gross income in the last taxable year from agriculture, have total debt of less than $1,500,000 including interest (excluding a home mortgage on a primary residence), and the debt is at least 80% related to farming, you may gain bankruptcy relief under the new operative Chapter 12.  Last year's tax return income is the key to qualifying.


2. WHAT ABOUT OUR PARTNERSHIP, CORPORATION, OR THE FACT THAT MY WIFE AND I ARE IN THE FARMING BUSINESS?

A corporation or partnership qualifies if 50 percent of the outstanding stock or equity is held by one family or by one family and relatives of the members of such family and the family actually conducts the farming business. In this special case, it is necessary that 80 percent of the value of the entity's assets be from farming operations, the debt be 80 percent from the family farming by family members, and the stock not be publicly traded.(1)

 

3. MY TOTAL DEBT IS VERY CLOSE TO $1,500,000. HOW CAN I TELL FOR SURE IF I QUALIFY?

The standard seems to be all debts, including interest, costs where allowed, and accumulated attorney fees on notes that allow for fees of that sort to be added to an obligation after default. The debt limit is a jurisdictional requirement which means that if petition date debt is in excess of $1,500,000, the court lacks jurisdiction to determine the merits; and a filed case must be dismissed or converted to another operative Chapter. It appears, if debt accumulates after filing and ends up over $1,500,000, the court may maintain its original jurisdiction and continue to hear the case.

 

4. I WORKED FOR WAGES LAST YEAR THAT ARE VERY NEARLY EQUAL TO MY FARM INCOME. HOW CAN I TELL FOR SURE IF I MEET THE QUALIFICATION?

For individuals a statutory test is set out in the bankruptcy code. Partnerships and corporations need not worry about the farm earnings requirement. The requirement is that 50 percent of last year's tax return income be from agriculture. Since agriculture is reported on an individual taxpayer's 1040 form schedule F, that form may very well be controlling. It makes sense to use it to report interest, capital sales and all other income related activities that may qualify on schedule F when jurisdictional qualification is being sought.

 

5. WHAT QUALIFIES AS AGRICULTURE?

Agriculture includes farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state.

 

6. HOW DO YOU DESCRIBE THE CHAPTER 12 PROCESS?

It parallels Chapter 13 in many respects. The significant differences are: a) that it allows a modified debt to be paid off over a period longer than the plan; b) secured creditors that are paid the value of their collateral are not required to vote on a proposed payout to be required to accept payment programs; and c) a debtor may sell the collateral of a secured creditor without permission as long as the creditor's lien attaches to the proceeds of the sale.

 

7. ARE THERE TIME LIMITS IN CHAPTER 12 LIKE IN CHAPTER 11?

Yes. In fact, Chapter 12 reorganizations occur much faster than Chapter 11's, and in the author's district they may be confirmed more quickly than Chapter 13's. A plan must be filed within ninety (90) days of the time a petition is filed. A plan must normally be at least set for a first hearing on confirmation within forty-five (45) days of the date it is filed.

 

8. HOW DOES CHAPTER 12 COMPARE TO CHAPTER 11?

Generally speaking, Chapter 12 is quicker and has significant advantages over Chapter 11. It makes possible the retention of property without the repayment of all unwilling unsecured claims (a difficult problem in Chapter 11). It allows the sale of certain assets without the consent of secured creditors -- something not possible under any other operative chapter of the bankruptcy code. There is also a very favorable definition of adequate protection that applies to real estate loans only in Chapter 12.

 

9. WHO PREPARES THE CHAPTER 12 PLAN?

Only the debtor may propose a Chapter 12 plan. As a practical matter, the actual plan is drafted by counsel with input from the debtor regarding relevant payment ability.

 

10. HOW IS THE PLANNING DONE TO MAKE DECISIONS REGARDING WHAT A FARM DEBTOR CAN AND CANNOT AFFORD TO PAY?

In our office we use computer spreadsheet analysis, professional appraisal values for collateral, and the individual debtor's best estimates for costs and income projecting. The attorney provides his best estimate of what creditor treatment the court will allow the debtor. The debtor provides his best estimate of how the operation can be run so as to avoid prior problems and to maximize current incomes.

 

11. WHAT DOES IT TAKE TO SUCCESSFULLY FILE A CHAPTER 12?

I have often said anyone can file reorganization bankruptcies, but it takes someone who knows what they are doing to get one confirmed. It then takes real tenacity to make the necessary payments to complete a three to five year program with strict budget limits.

 

12. BESIDES SKILL IN DRAFTING AND DETERMINATION, WHAT ELEMENTS NEED BE PRESENT FOR IT TO BE LIKELY THAT A CHAPTER 12 WILL BE SUCCESSFUL?

Judges deciding the feasibility of a reorganization case have written, "*** the same management, the same sphere of influence, and no new capital, do not make for a very likely reorganization candidate. It takes new capital, a significant change in operating influence, or new management.***"

Congress allows a qualified Chapter 12 candidate to significantly reduce its debt if there are under-collateralized creditors involved. This can be a source of new capital. Basically speaking, however, a farm will not yet buy itself from farm produce. An operation attempting to write down debt that has no available equities (e.g. a paid for herd, or wages from a job in town, a farmstead with a very low interest rate loan, or some other competitive advantage) will not be very likely to meet the payment requirements in an expensive Chapter 12 proceeding.

 

13. WHAT TREATMENT DOES CHAPTER 12 ALLOW OF LONG-TERM LOANS?

In addition to the Chapter 13 treatments (being able to cure arrearages over a reasonable term -- maybe as long as the plan itself -- while making currently accruing contract payments, or to pay the loan off entirely over three to five years) Chapter 12 allows a long-term loan to be restructured; and the loan as remade then becomes the debtor's contract with its creditor. The term has to be reasonable and the discount rate (i.e. interest) for the remade loan also has to be reasonable, but not necessarily the original terms. If the treatment is to be without the creditor's acquiescence, its lien must be allowed to remain in place and the payment must be at least the lesser of the collateral value or the amount of the obligation with interest, costs and attorney fees, if any, in the event of collateral value adequate to protect the creditor's claim for these. This makes possible paying large obligations, as long-term debt often is, where as in Chapter 13 that is seldom possible.

 

14. WHAT TREATMENT DOES CHAPTER 12 ALLOW FOR SHORT-TERM DEBT?

Basically Chapter 12 is the same as Chapter 13 as far as short-term debt is concerned. It can be paid over the life of a plan -- three years or for cause extended to five years. The payments are usually pro rata with all unsecured claims taking a share from payments made by the debtor. Chapter 12 payments are probably going to be mostly annual. Unsecured debt does not necessarily have to be paid in full in Chapter 12.

 

15. WHAT TREATMENT DOES CHAPTER 12 ALLOW OF UNSECURED DEBT?

Unsecured debt includes under-collateralized deficiency claims, and does not vote in a Chapter 12 proceeding. The Chapter 12 must pay this class of creditors at least as much as it would receive in a Chapter 7 bankruptcy. A Chapter 12 debtor, on the request of a party in interest, must commit all of its disposable income for the period of the plan to creditors, but this apparently may be secured creditors. Congressional discussions of the public law that enacted Chapter 12 make it pretty clear that unlike Chapter 13 proceedings where some unsecured debt payment is usually required to meet the good faith test, Chapter 12's do not have the same public pressure. It may be possible to have a Chapter 12 confirmed without payment to unsecured creditors.

 

16. HOW ARE ATTORNEY FEES PAID IN CHAPTER 12?

Like in all chapter proceedings, the bankruptcy judge must approve attorney fees. On the filing date, the debtor must disclose actual payments. The filing attorney must verify the accuracy of the pre-petition payments by affidavit that aligns with the debtor's disclosure. After filing, the court approves all fees on application of the debtor's attorney.

 

17. WHERE DOES THE MONEY COME FROM TO PAY THE ATTORNEY WHO REPRESENTS THE DEBTOR AND THE DEBTOR'S ESTATE?

From the debtor or the debtor's estate. Usually a substantial retainer is required. Sometimes a portion of what is earned can be paid out by the debtor under the Chapter 12 plan, or paid directly by the confirmed debtor to counsel after court approval.

 

18. HOW MUCH DOES A TYPICAL CHAPTER 12 COST?

There is no such thing as a "Typical Chapter 12." Each case is a little different and all are so complicated that the only charging technique that I have found that makes sense is time based charges on a fixed hourly rate. The simplest Chapter 12 case is costing my clients over $1,500 and many complicated cases exceed $5,000. An occasional case can exceed $10,000, depending largely on how actively involved counsel becomes dealing with secured creditors.  It also adds to the fees if a particular creditor is obstructive or just vigorous in defense of its position.

 

19. IS A CHAPTER 12 FILING A "BANKRUPTCY" AND WILL SOMEONE FILING ONE HAVE THE SAME STIGMA ASSOCIATED WITH FILING BANKRUPTCY UNDER ONE OF THE OTHER OPERATIVE CHAPTERS?

Yes. Please do not let anyone ever tell you that filing bankruptcy under any operative chapter will not affect future credit. Generally speaking, especially with sophisticated lenders, it is less damaging to file a successful Chapter 12 or Chapter 13 than to file a straight Chapter 7.

 

20. WHAT HAPPENS IF A CHAPTER 12 IS FILED AND IT IS NOT CONFIRMED?

Unfortunately many practitioners rushed in to the bankruptcy court with eager clients right after Chapter 12 became available to find out that Chapter 12 will not solve everyone's problems. Like a Chapter 13, however, a Chapter 12 may be dismissed at any time by the debtor unless the case has been converted on a prior occasion. A debtor may also choose to have a Chapter 12 converted to Chapter 7. The court, for cause, may dismiss, but may convert to Chapter 7 only if the debtor consents.

 

21. WHAT HAPPENS IF A CHAPTER 12 IS CONFIRMED AND THEN OPERATIONS ARE NOT SUCH THAT THE PROPOSED PAYMENTS CAN BE MADE?

A confirmed Chapter 12 plan, after notice and hearing, may be modified, dismissed or with leave of court converted to Chapter 7.

 

22. CAN A FARMER FILE A CHAPTER 12 WITHOUT AN ATTORNEY?

Yes. Just as an attorney can drive a four wheel tractor or buy cattle at a sale. Unless a farmer understands the intricacies of reorganization, he will probably find skilled counsel cost effective.

 

23. WHAT ROLE DOES THE JUDGE PLAY IN A CHAPTER 12 FILING?

The court becomes involved if a lawsuit is filed in the bankruptcy court against the debtor to decide judicial issues like the adequacy of a contested offer of protection to avoid stay relief, and certainly presides over the important hearing on confirmation.

 

24. WHO IS THE CHAPTER 12 TRUSTEE AND WHAT ROLE DOES THE TRUSTEE PLAY?

The Chapter 12 trustee is a person who serves like a Chapter 13 trustee. The trustee's role includes conducting the 341 meeting.   Colorado has an experienced standing Chapter 12 Trustee.   His experience is beneficial to the process.  The trustee monitors monthly reports and requests information from the debtors in the nature of tax returns, cash flow projections and operating summaries.  

 

25. WHAT STEPS ARE INVOLVED WITH AN ATTORNEY IN FILING A CHAPTER 12?

This is an important question asked by every client we interview. Since seldom can a client decide if Chapter 12 will be in their best interests without the aid of counsel, the better approach is to review the sequence of a client's contact with counsel in the Chapter 12 process. The steps are basically as follows:

     a. Initial contact with counsel;

     b. Obtain and review basic information and guidelines to make possible gathering the information relevant for counsel's consideration so that an initial conference can be efficient--it can be done without preparation, but the cost of telling a life-long-story is seldom money well-spent;

     c. An initial conference with counsel to discuss options;

     d. Detailed fact gathering and locking up loose ends, which often includes contacting secured lenders;

     e. A second conference with counsel or the farm's accountant and counsel to analyze the particulars for possible inclusion in a Chapter 12 plan. In an emergency situation this can be done after filing;

     f. The cash flow in agriculture are so tight, skilled counsel usually insists on detailed cash flow planning assuming the particulars of Chapter 12, prior to committing a client to the rigors of Chapter 12;

     g. Filing the actual petition which can be prepared from the information gathered for b. above;

     h. An appearance at a meeting of creditors;

      i. Counsel's contact with necessary creditors regarding confirmation;

      j. Obtaining accurate appraisal opinion for the purpose of the confirmation valuation hearings;

      k. Appearance at confirmation hearing;

       l. Continued availability for possible changes or modifications.


26. ARE THERE SPECIAL REQUIREMENTS FOR THE CHAPTER 12 DEBTOR AFTER FILING?

Yes, current monthly financial reports are requested by the Chapter 12 trustee. These are required for the months before and, unlike Chapter 11, after confirmation. Like in all bankruptcy proceedings, the debtor has the duty to cooperate with the trustee, and as the trustee's role is being defined this is especially important.


27. WHO OPERATES THE FARM AFTER THE PETITION IS FILED?

Unless there is misconduct, the petitioner. In the event of misconduct, after a hearing, the court may require the trustee to actually run the business.

 

28. WHAT DOES CHAPTER 12 DO TO PROVIDE OPERATING MONEY AFTER FILING?

This is an easy question to answer. It not only does nothing, it virtually guarantees difficulty borrowing money anywhere! A very critical phase of the analysis we do in a potential Chapter 12 situation is to anticipate the operating bank balance at the end of each month after filing based on known revenues and known incomes. We cannot always be exact, but we usually can spot a circumstance where annual revenues are adequate but the money does not come in time to pay the up-front costs. There are occasions where a post petition operating lender can be found, and the bankruptcy makes it possible to safely borrow under special application procedures.

 

29. THE BANK HAS A SECURITY INTEREST IN ALL OF MY CROPS AND ANIMALS. IF I FILE CHAPTER 12, CAN I SELL THE BANK'S COLLATERAL AND USE THE PROCEEDS TO OPERATE?

Only with court approval. After filing, the proceeds of otherwise secured loans are still the bank's collateral. There is a procedure to apply for special court permission to use this "cash collateral." But to be given permission to do so by the court requires that the debtor obtain the creditor's permission or provide the creditor with the "indubitable equivalent" of the cash to secure its position. Practically speaking, that means it requires a large amount of collateral to use a little bit of cash and an operation that is probably going to be reorganized.

 

30. OUR RANCH IS A CORPORATION. THE LAND IS HELD BY A PARTNERSHIP, AND ALL OF US HAVE SIGNED THE BIG NOTES AS INDIVIDUALS. WILL CHAPTER 12 FILING BY THE CORPORATION PROTECT ALL OF US?

The protection of a Chapter 12 filing by one entity only protects co-signers of consumer debt, and then only if the plan is to pay the claim of the secured creditor in full will it be permanent relief. It may require multiple filings to be effective in multiple entity situations. In rare instances, bankruptcy courts have used their equitable powers to protect the entities which are necessary to a successful reorganization.

 

31. MY TOTAL DEBT EXCEEDS $1,500,000. IS THERE ANY WAY MY OPERATION CAN USE CHAPTER 12?

There may be some way to break a larger operation up into small enough operations to allow multiple Chapter 12's. It remains to be seen how the courts will treat this approach. You should be aware, that Chapter 11 may make possible a meaningful reorganization in larger cases as it has no dollars and cents jurisdictional limits.

 

32. HOW HAVE CREDITORS REACTED TO CHAPTER 12?

Generally speaking, creditors have changed their whole philosophy regarding ag loans in the last five years. Chapter 12 is only one factor in that metamorphosis. Banks are not anxious to make under-secured loans, and Chapter 12 is most powerful when a loan becomes undersecured. It is, therefore, more difficult than ever to get an undersecured loan. Bankers are also looking for an ag operation that cash flows. Absent redeeming inflation, farmers will have to be able to repay their loans like all other borrowers. It is not altogether amazing that the same detailed analysis that is being used to guide a Chapter 12 debtor is being used by bankers to avoid the problems they have with borrowers that are not in control of their operations.

 

Do you have a question about Chapter 12 or bankruptcy in general?

Click here to e-mail your question to the firm. QUESTION  Responses of general interest may be used to update Plain Talk. all Wyoming and Colorado inquiries will receive a reply.

 

__________________

1. 1See 11 USC 109(f) referring to 101(a)(17)

[Plain Talk]

Home ] Up ] PT Chapter 13 ]