Rangeland consultant Allan Savory once said, “Without agriculture, it is not possible to have a city, stock market, banks, university, church or army. Agriculture is the foundation of civilization and any stable economy.”
Because agriculture is an essential component of our way of life, the federal government has created certain laws and policies in an effort to ensure the continued success of agriculture within the U.S. One such law was passed in 1986, adding a new chapter to bankruptcy law, Chapter 12, titled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income. This chapter of the bankruptcy code is specifically used for the adjustment of debts of a family farmer with regular annual income.
Unfortunately, bankruptcy is often associated with underperformance or carelessness. However, this should not be the case. Filing a Chapter 12 bankruptcy can be a great tool and resource for families engaged in agriculture who find themselves in a difficult situation and face going out of business or losing their farm. This article briefly explores the process of filing a Chapter 12 bankruptcy and what an individual considering filing can expect. The information provided in this article was taken from the Chapter 12 – Bankruptcy Basics page of the United States Courts website.
Filing a petition
A Chapter 12 bankruptcy begins with the family farmer, which can be an individual or a corporation or partnership, filing a voluntary petition for bankruptcy with the bankruptcy court serving the area where the farmer lives. Along with the petition, the farmer must also provide a schedule of the farm’s assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts (agreements that still need to be fulfilled) and unexpired leases, and a statement of his or her overall financial affairs. A list of all known creditors and the amounts and nature of the creditors' claims must also be provided. All forms required to file a Chapter 12 bankruptcy can be found on the United States Courts’ website for free. Filing the petition and accompanying documents costs $275.
Once the petition has been filed, a case is created and the farmer is referred to as the “petitioner” or “debtor” within the bankruptcy filings and proceedings. An “automatic stay” is effective immediately through operation of law and prevents most creditors, including consumer debt creditors, from being allowed to collect against the petitioner and his or her property during the duration of the bankruptcy action. A Chapter 12 bankruptcy also contains a special automatic stay provision that protects co-debtors (people who have co-signed or guaranteed the farm debt). A trustee is then appointed by the court to administer and evaluate the case, collect payments from the petitioner and make distributions to creditors.
Repayment plan
The central element of the Chapter 12 bankruptcy is the repayment plan. The purpose of the repayment plan is to allow the petitioner to assign a fixed payment amount for all known debts, to be made to the trustee during the course of the bankruptcy, while maintaining control over the farm and continuing to conduct business. The repayment is to last between three to five years, depending on the needs of the petitioner, as determined by the court. The repayment plan must be filed with the petition or within 90 days after filing the petition.
The trustee, appointed by the court, is in charge of ensuring that the petitioner follows the repayment plan and distributes the payments collected from the petitioner to the creditors. The repayment plan is structured around paying off the petitioner’s debts in the order of the priority of creditors’ claims. It is expected that the plan will offer creditors less than full payment on their claims. The payments are to be made with the petitioner’s disposable income, or income which is not needed for the maintenance or support of the petitioner, dependents of the petitioner or for making payments needed to continue and preserve the petitioner’s business.
There are three types of creditor claims: priority, secured and unsecured. Priority claims are those as defined by bankruptcy law, such as taxes and the costs of bankruptcy proceedings. Priority claims must be repaid first and in full. Secured claims are paid second and must be paid at least as much as the value of the collateral pledged for the debt. Unsecured claims are last in line to be paid and are only required to be paid at least as much as they would receive if the petitioner’s nonexempt assets were sold.
Approximately 30 days after the filing of the petition, the trustee holds a “meeting of creditors." The petitioner is required to attend the meeting and answer questions from the trustee and creditors who have filed claims. These questions relate to the petitioner’s financial affairs and the proposed repayment plan. The parties can negotiate and try to resolve any perceived problems with the plan either during or shortly after the creditors' meeting.
Confirmation hearing
Within 45 days after the petitioner has filed the repayment plan, a confirmation hearing is held where the presiding bankruptcy judge decides whether the plan is practicable. If the judge approves the plan, the trustee will distribute funds received according to the terms of the repayment plan over the duration of the three to five years. If the judge does not confirm the plan, the petitioner has the opportunity to file a modified plan and reseek approval. If denied, the petitioner may also choose to convert the Chapter 12 bankruptcy into a Chapter 7 bankruptcy, also known as a liquidation bankruptcy.
Discharge
At the end of the three to five years, the petitioner will receive a discharge of its debts after completing all payments as required by the repayment plan. The discharge granted by the court has the effect of releasing the debtor from all debts listed under the plan. Creditors who received only partial repayment under the plan are no longer able to initiate or continue any legal action against the petitioner to collect on the discharged obligations. Additionally, the court has the option of granting a hardship discharge. This discharge is available only to petitioners whose failure to complete the repayment plan is due to circumstances beyond the debtor’s control. Once the discharge has been granted, the case is closed and the bankruptcy is completed.
Bankruptcy law and its proceedings are complex and this article serves only as a brief summation of the overall process. Because of its complexity and specific requirements regarding eligibility, it is important to seek the counsel of a licensed bankruptcy attorney before filing for bankruptcy. An attorney will be able to help determine if a Chapter 12 bankruptcy will be the right tool to use to assist in preserving the continued success of the family farm.
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