Congress amended the bankruptcy law in 1986 to create a new bankruptcy remedy specifically for farmers and ranchers, known as Chapter 12. Prior to that, farmers and ranchers were forced to reorganize under Chapter 11, which is really designed for non-farm businesses, or file under Chapter 13, which is primarily intended for individuals with consumer debt. Chapter 12 was a hybrid between the two other reorganization chapters, and included the best of both. Especially important was the ability of farmers and ranchers to restructure long term debt, including mortgages secured by a homestead, which could not be done under Chapter 13. The problem with Chapter 12 was that Congress created it as a “temporary” chapter to the bankruptcy law, intending it to expire or “sunset” after a few years. However, each time that Chapter 12 was about to expire, it was extended again by Congress, but still on a temporary basis. Finally, in 2005, Congress made Chapter 12 a permanent part of the bankruptcy code.
So how does Chapter 12 work? First, the person filing must be a “family farmer” as defined by the law, meaning that the debtor must be a farmer or rancher with at least 50 per cent of the debt arising out of the farming operation, and with at least 50 per cent of the debtor’s gross income for the preceding taxable year being from the farm or ranch operations. If those requirements are met, the farmer or rancher can file a Chapter 12 petition, and must file a Chapter 12 plan of reorganization within 90 days of filing the bankruptcy petition. A farm corporation or partnership will be eligible to file a Chapter 12 case if it meets four specific conditions. First, at least 50 percent of the stock or equity of the corporation or partnership must be held by one family, with that family conducting the farming operation. Second, more than 80 percent of the value the corporation or partnership’s assets must be related to the farming operation. Third, the aggregate debts must not exceed $3,544,525 with not less than 50 percent of that arising from its farming operation. As with an individual, the $3,544,525 debt ceiling is automatically adjusted every three years to reflect any change in the Consumer Price Index.
The Chapter 12 Plan is essentially a restructuring of existing debts. For example, as to secured debt, the plan can propose to pay the value of collateral rather than the full debt if the collateral (property securing the debt) is less than the amount of the debt. If a tractor is worth $25,000.00, but has a $35,000.00 debt, the plan can propose to pay the value of $25,000.00, with the $10,000.00 difference becoming an unsecured debt. The plan can also modify the length of debt repayment, extending it beyond the amount called for in the original note. The plan can also modify the interest rate. As to unsecured debt, interest stops on filing and doesn’t have to be paid. In some cases, all or part of the unsecured debt can be discharged after the plan is complete. The frequency of payments can also be adjusted. For example, if payments are scheduled by a creditor’s note to be made before harvest, the plan can modify that requirement to make the payment come due after harvest.
Plan payments are made to the Chapter 12 trustee during the first three to five years of the plan. The trustee then distributes those payments to creditors pursuant to the plan provisions. After the three to five year period, the plan payments terminate and unsecured debts are discharged. Long term secured debts are then made directly by the debtor to secured creditors.
Bankruptcy is a federal law and cases are filed in bankruptcy court, which is part of the federal court system. There are three bankruptcy court locations in Kansas: Topeka, Wichita, and Kansas City. The person filing Chapter 12 will have to attend a meeting of creditors, known as a “341 meeting,” about 30 days after the case is filed. This meeting is with the trustee, and although creditors can attend, they are not required to. The 341 meeting is held in the city where the case is filed: Topeka, Wichita, or Kansas City, as appropriate. After the plan is filed, the court sets a hearing to confirm or approve the plan. If creditors object to plan provisions, they must file written objections to the plan. The court will then hear and consider those objections as part of the confirmation process. Once the plan is confirmed, it then is binding on all creditors, and supercedes any provisions in promissory notes and security agreements.