The Law Offices of Ken McCartney P.C.




In response to an agricultural down-turn in 1986, the United States Congress filled in an even numbered chapter in the Bankruptcy Code as originally enacted in 1979. Chapter 12 is an operative chapter. That is, relief may be requested under Chapter 12.

Chapter 12 is very similar to Chapter 13. The code section numbers often  are nearly identical. The differences are noteworthy:

  • To be eligible to file Chapter 12, a debtor entity  (an individual, a husband and wife, a family partnership, or a family corporation) must receive fifty percent (50%) of its income the year before filing in the agricultural industry. There is litigation, of course, over the definition of agriculture, profits, and family. If your situation is not simple and clear, investigate.
  • Adequate protection of a secured creditor where the collateral is land, includes the fair rental value of the agricultural land. This simplifies the process of defending stay relief.
  • A long-term creditor's claim may be modified by the debtor's three to five year plan and the modified payments effective for the balance of the contract period at the modified rate. Thus, a thirty year land loan can be modified over thirty years, not just for the three years of the plan. This is a powerful tool that expands the relief Chapter 12 provides far beyond what a Chapter 13 plan is able to do in 60 months.
  • There are total debt limits in Chapter 12, like in Chapter 13. Entities whose total debt exceeds these sums are ineligible for Chapter 12 relief.  Unlike Chapter 13, these numbers do not float with economic indicators. The limit need not include debt on a principal residence which happens to be located on the farm. The total at this time is $1,500,000. If a farm's total debt exceeds this sum, Chapter 12 is not available. Chapter 11 is the alternative. 
  • 80% of the debtors' assets must be related to agricultural purposes.
  • Chapter 12 does not require a disclosure statement as does a Chapter 11, but most Chapter 12 trustees require a liquidation analysis  and a solid  projection of future  operations to determine feasibility.  These are normally appended to the plan.
  • The Chapter 12 trustee is a stand-alone  appointee of the bankruptcy court. Compensation is dependent on plan success, and as a consequence, trustee cooperation is better than from the Office of the United States Trustee in Chapter 11 proceedings.
  • A Chapter 12 cannot be involuntarily converted to a Chapter 7. A Chapter 12 may be dismissed or converted by the debtor, one time, to a Chapter 7 or Chapter 11. Subsequent conversions require court approval in the best interests of the "debtor and creditors."
  • Creditors do not vote in Chapter 12.
  • Unsecured creditors are paid only if "all of the debtor's disposable income" allows for it.
  • Secured creditors can be required to go along with a feasible plan proposed in good faith if:
    • their collateral is surrendered, and after a foreclosure according to law, any deficiency is allowed as an unsecured claim,
    • they receive  a string of payments whose present value is equal to the value of their collateral,
    • they are cashed out at confirmation by the debtor, or under proper protection by a qualified sale of all or part of their collateral.
  • Chapter 12 is the only operative chapter in the current code that directly allows for the sale of part of a creditor's collateral (e.g. the dry land or the swamp or a developable home site). The process involves creditor or court approval to avoid "cherry picking."
  • The time between filing and confirmation in Chapter 12 should always be quicker than Chapter 11. The code requires a plan be filed within ninety (90) days of the petition date. Life is not so simple, however, as this office confirmed a 1998 Chapter 12 in February of 2001. Court approval of each extension of time is required and will be granted only for good cause.  The Reform Act shortened allowable continuances here but did nothing to reduce the burden the trustee represents to the debtors' ability to pay.
  • A real problem with Chapter 12 in Colorado and Wyoming is that the trustee is paid 10% of sums paid to creditors.  Where agricultural loans are involved payments can be large. This surcharge often makes chapter 11 with all its difficulties a better choice.
You may wish to check out Chapter 12 of Plain Talk About Bankruptcy for frequently asked questions and answers concerning Chapter 12 bankruptcy.

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