Chapter 12 Bankruptcy Overview
Chapter 12 is one of the rarest and least-understood type of bankruptcy filings. Chapter 12 is a special type of debt restructuring bankruptcy that is reserved for family farmers and family fisherman. It allows struggling family farms and fishing operations to reduce their debt load and to make the operation viable again.
Bankruptcy for Family Farmers and Fishermen
Both people and business entities are eligible for Chapter 12 bankruptcy protection. For both people and businesses, at least 50% of the non-mortgage debts must be farm-related and the total debts must not exceed $3,792,650 (for a farming operation) or $1,757,475 (for a commercial fishing operation). For people, at least 50% of their gross income from the previous years must be farm-related. For business entities (such as corporations and LLCs), the entity must be at least 50% owned by one family or relatives, the family must actually operate the farm, and at least 80% of the business’s value must be farm-related.
In operation, Chapter 12 is a hybrid of Chapter 11 and Chapter 13 bankruptcies. Chapter 12 is more streamlined and less expensive than Chapter 11, which is designed for large corporate restructurings, and Chapter 12 is more flexible than Chapter 13, because it can be adapted to the seasonal nature of income for many farmers and fisherman. In Chapter 12, the debtor proposes a debt repayment plan to repay all or a portion of the debts within a period of three to five years. That plan is reviewed by the Bankruptcy Court Judge and the creditors involved and the Judge confirms or rejects the plan. If the plan is rejected, the plan can be modified, or the case could be converted to a Chapter 7 bankruptcy. If confirmed, the plan is binding on all creditors.
“Cram Down” of Secured Debts in Chapter 12
In the reorganization bankruptcies (Chapters 11, 12, and 13), one of the Debtor’s biggest tools is the Debtor’s ability to “cram down” secured debt. Secured debt is a debt that is attached to collateral, such as an auto loan on a vehicle. With a “cram down”, the debtor can reduce the amount of the secured debt to the current sale value of the collateral. For example, if the debtor financed a truck or tractor and still owes $20,000 on the loan, but the vehicle is now worth only $15,000, the loan can be reduced (or “crammed down”) to $15,000.
There are limits on the Debtor’s ability to cram down loans. For example, in Chapters 11 and 13, a Debtor cannot cram down the mortgage on the Debtor’s principal residence. However, that prohibition does not exist in Chapter 12. So, if a Chapter 12 Debtor’s house is underwater, the principal balance of the mortgage can be reduced to the current value of the house, and the interest rate may be adjusted as well. This can be a powerful tool for farmers, especially when the farmer lives and farms on the same land.
Is Chapter 12 an Option for You?
There are many family farms in Oregon and particularly in Central Oregon, and many are in financial distress. Chapter 12 may be instrumental in helping those family farms survive the economic downturn and become viable again.
This is a basic overview of Chapter 12 bankruptcy. In practice, Chapter 12 can be extremely complicated and should only be undertaken after careful analysis with the assistance of a qualified bankruptcy attorney. Furthermore, Chapter 12 bankruptcy may not be a solution for all problems and other factors may affect the decision to file for Chapter 12 bankruptcy protection.
If you would like more information and the opportunity to discuss whether Chapter 12 bankruptcy is an option for you, please feel free to contact Brian T. Hemphill.