In order to better protect family farmers with large debts, Congress in 1986 enacted chapter 12 of the Bankruptcy Code. (Chapter 12 also applies to “family fisherman” but, given the landlocked geography of Colorado, emphasis here will be placed on farmers.)
In many ways, chapter 12 and chapter 13 are identical: both chapters require that the debtor have a regular income; a re-payment plan implementing a strict budget and based upon disposable income determined by gross income and personal expenses and farming expenses is submitted to the court, trustee and creditors; plan payments are made for 3 to 5 years resulting in debtors paying back 0% to 100% of unsecured debts; debtors can reconcile non-exempt assets which would otherwise be liquidated, and many secured debts can be “crammed down” to the asset’s value.
And similar to both chapter 7 and chapter 13 matters, chapter 12 debtors are required to obtain credit counseling prior to filing and attend a 341 meeting of creditors before a trustee.
But, for many farmers in Colorado, chapter 12 is advantageous for several reasons. Unlike chapter 13 personal bankruptcy, individuals or corporations/partnerships may file for chapter 12. Individual or married debtors must meet the following requirements:
- The debtor is involved in a farming operation,
- The combined secured and unsecured debt limits are much higher than chapter 13 - $3,544,525 as of 2011 (compared with only $1,081,400 for secured debts and $360,475 in 2011 for unsecured debts in chapter 13) – each of these numbers are inflation adjusted,
- At least 50% of the total debts must be farming related, and
- At least 50% of the debtor’s gross income for each of the past two tax years (before the year of filing) must be farming related.
A corporation or partnership will be eligible for chapter 12 relief if the following requirements are met:
- Over 50% of the corporation or partnership’s stock or equity is held by one family or that family’s relatives,
- The family or the relatives of the family are engaged in the farming operation,
- Over 80% of the corporation or partnership’s assets are related to the farming operation,
- The corporation or partnership’s total debts must be $3,544,525 (in 2011) or less,
- At least 50% of the corporation or partnership’s debts are farming related, and
- Any corporate debtor cannot be publicly traded.
An individual or corporate/partnership debtor is ineligible for chapter 12 relief if a previous bankruptcy petition was dismissed within the past 180 days for the debtor’s willful failure to appear in court or obey a court order. Ineligibility for relief will also result if the debtor previous bankruptcy was voluntarily dismissed after creditors attempted to recover secured property through the Colorado Bankruptcy Court.
Although both chapter 12 and chapter 13 allow for a “cram down” of secured debts, the former more generously allows for the mortgage on a principal residence to be modified down to fair market value and does not mandate that a motor vehicle loan crammed down be 910 days old or more. Another difference from chapter 13 is that chapter 12 allows for debtors to confirm a plan without consistent monthly income given the seasonal nature of farming operations.
If you own a family farm with significant debt, an experienced Denver bankruptcy lawyer will discuss your chapter 12 bankruptcy and reorganization options. Attorney David M. Serafin will help you fight to continue your family farming operations, while reducing debt, in the face of severe financial distress.