The New Rules for Family Farmer Bankruptcies - Chapter 12

Roger Minch
June 27, 2008 — 1,245 views  
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If debtors or debtors’ counsel are looking for good news in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), they will probably need to look to Chapter 12.

Chapter 12 was an amendment to the Bankruptcy Code in the mid 80’s to address what was then seen as a national farm crisis.  To get the amendment passed, the statute had a two-year sunset provision.  Ever since, Chapter 12 has had to be re-enacted, and there have been gaps.

But with BAPCPA, Chapter 12 is now a permanent feature of the Bankruptcy Code.

Eligibility requirements have been greatly expanded.  The definition of “family farmer” now means an individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $3,237,000.00.  The old limit was $1,500,000.00.  Under the new law, not less than 50% of the debtor’s aggregate non-contingent liquidated debts, on the date the case is filed must arise out of a farming operation.  The old limitation was 80%.  As before, 50% of the debtor’s gross income must come from the farming operation.

Although not particularly relevant to the Midwest, “family fisherman” are now also eligible for Chapter 12 relief if the aggregate debts do not exceed $1,500,000.00 and 80% of the debts arise out of a commercial fishing operation.  In addition, the new homestead limitations of BAPCPA do not apply to family farmers.

In Chapter 12, holders of domestic support obligations are also accorded special treatment.  For example, the Chapter 12 Trustee must provide a special notice to the holder of the claim advising the holder of its right to use the services of a state child support enforcement agency and giving the address and telephone number of the agency.  In addition, the Trustee must notify the state child support enforcement agency of the claim and give the agency the name, address and telephone number of the holder of the claim.  Notice of the Chapter 12 discharge must also be given to the state child support agency and the holder of the domestic support obligation of the granting of the discharge, the last recent known address of the debtor and the last known name and address of the debtor’s employer.

Added to the grounds for conversion or dismissal of a Chapter 12 case is the “failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition”.

Most of the confirmation standards stay the same.  For example, the plan must provide for the full payment, in deferred cash payments, of all claims entitled to priority unless “the claim is a claim owed to a governmental unit that arises as a result of the sale, transfer, exchange or other disposition of any farm asset used in the debtor’s farming operation, in which case the claim shall be treated as an unsecured claim that is not entitled to priority under §507, but the debts shall be treated in such manner only if the debtor receives a discharge”.

As with Chapter 13, a Chapter 12 plan may provide for less than full payment of all amounts owed for claims entitled to priority only if the plan provides that all of the debtor’s projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.

The plan must also provide for payment of interest accruing after the date of the filing of the petition on unsecured claims that are non-dischargeable under §1228 (a).

A Chapter 12 plan cannot be confirmed unless the debtor has paid “all the amounts that are required to be paid under a domestic support obligation and that first become payable after the date of the filing of the petition if the debtor is required by a judicial or administrative order, or by statute, to pay such domestic support obligation”.

The new law limits plan modification if to do so would “increase the amount of any payment due before the plan as modified becomes the plan” and a plan cannot be modified by anyone except the debtor, based on an increase in the debtor’s disposable income, to increase the amount of payments to unsecured creditors required for a particular month so that the aggregate of such payments exceeds the debtors disposable income for such month or in the last year of the plan by anyone except the debtor, to require payments that would leave the debtor with insufficient funds to carry on the farming operation after the plan is completed.

As before, the goal in a Chapter 12 case will be to reach conservative (low) values on collateral securing under secured claims and then proposing a plan that proposes to pay allowed secured claims over the longest possible time at the lowest possible interest rates, while keeping disposable earnings projections in line with the minimum payment required of unsecured creditors (at least what they would have received if the case were a Chapter 7 case) all in keeping with the over all “good faith” requirement of Chapter 12.

Roger Minch

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. Mr. Minch's past and present activities include serving as the past chairman of the Continuing Legal Education Committee of the State Bar Association of North Dakota, and as member of the Information and Service Committee of the State Bar Association of North Dakota. He is a current member of the Bankruptcy Rules Committee of the State Bar Association of North Dakota, the Commercial Law League of America, the bankruptcy section of the Minnesota State Bar Association and the American Bankruptcy Institute. He has written numerous Continuing Legal Education outlines and text for legal seminars for the State Bar Associations of North Dakota and Minnesota, banks, savings and loans, credit union associations and private suppliers of continuing legal education programs concerning bankruptcy, collections and real estate foreclosure.