Chapter 12 Bankruptcy is Like Chapter 13 on Steroids!

27 Mar Chapter 12 Bankruptcy is Like Chapter 13 on Steroids!

I have been filing Chapter 13 and Chapter 7 bankruptcy cases in the upstate New York for over 20 years. Due to the many financial difficulties dairy farmers have been having over the past few years, I started filing more Chapter 12 farm bankruptcies.

There are very few farm bankruptcy filings compared to Chapter 7’s and 13’s, but in many ways they are so much more effective for the farmers who are forced into seeking the relief of a Chapter 12.

For one thing, the other players in the bankruptcy system seem to respect the farmers more than they sometimes do with Chapter 7 or Chapter 13 debtors. The judges are well aware of the daily hard work they must do to keep their farms going, and the financial risk they take due to unpredictable weather. For example, we had a 15 degree hard frost last night after an extended period of 75 degree heat opened up the buds of the fruit trees. In my experience, even most creditors, especially FSA/USDA, try to accomodate reasonable plans and requests of farm debtors.

The trustee also loves Chapter 12’s. We are especially fortunate here because our trustee is both Chapter 12 and 13 trustee, and is the current president of the Chapter 12 Trustee association. Most Chapter 13 trustees earn a set salary, but those that are also Chapter 12 trustees earn additional personal income on top of their Chapter 13 income. In fact, when the last Chapter 12 & 13 trustee in our district became a Bankruptcy Court Judge, he actually took a decrease in pay!

Many struggling farmers learn about farm bankruptcy through government funded agencies designed to help farmers survive. Here in New York, an organization called Farm Net, which is funded by New York State Dept. of Agriculture and Markets, gives them advice as to their options and helps them find legal help when they need it. Farm Net’s mission statement is to provide farm families with a network of contacts and support services to help them develop skills for dealing with life challenges and transitions – through personalized education, confidential consulting, and referral.

While Chapter 12 procedure varies in each district, most of the powerful benefits are the same throughout the nation. Like other individuals filing bankruptcy, the Chapter 12 debtor is still required to do credit counseling, but they do not have to do the means test.

Unlike chapter 13’s, the farm debtor is under no obligation to make payments to the trustee until 30 days after the Chapter 12 plan gets confirmed. I usually don’t even file a proposed Chapter 12 plan for 3 or 4 months after filing the petition. Some secured creditors (usually not FSA/USDA) demand adequate protection payments until the plan gets confirmed, but usually agree to a reasonable monthly amount (and much less than the usual required monthly payments).

The cram down ability of a Chapter 12 is truly amazing, and if they would only allow the same provision to apply to Chapter 13’s they would solve the mortgage/foreclosure crisis, in my opinion. Any secured debt, including mortgages (residential and other), chattel mortgages, equipment loans, etc. can be recast to allow the debtor to pay only the value, at market rate interest, and over a longer term. For instance we usually set the term for mortgages at anywhere from 25 to 40 years, and set the term for equipment and chattel loans to 10 to 15 years. The plan calls for the first 5 years of payments to be paid through the trustee, and after that directly to the creditor, at the “modified” amount.

Some other advantages found in Chapter 12’s are that you may be able to reject a bad gas and oil lease,you may be able to save considerable income taxes if you sell your farm, and you don’t have to get an order extending the automatic stay beyond 30 days if you were in a previous Chapter 12 in the prior year.

Several of my chapter 12 plans have balloon payments built into them from either sale of land, or from money from a gas lease (we are in natural shale gas country, and if and when New York State resolves the controversy over hydro-fracking some of these farmers will get millions of dollars from gas leases.)

The only real down side is that the trustee gets a 10 percent dividend on all payments paid in the plan, and they usually insist that all secured debts be paid in the plan for the first 5 years.

Most of my Chapter 12’s have been for dairy farmers, but I have also done them for horse farms, for logging operations, and even for a butterfly farm! As long as you can show that at least 50% of the debtor’s income last year OR in the 2 years previous to last year was from farming (or fishing).

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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