| | 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Congress filled in an even numbered chapter in the Bankruptcy Code as originally
enacted in 1979.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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