Options Under Chapter 12 Bankruptcy Law for Farmers and Fishermen With Economic Downturn Losses

April 1, 2020
Kevin J. Thornton, Esquire | Eric A. Browndorf, Esquire 

Chapter 12 of the Bankruptcy Code is not well-known and is not used as frequently as are Chapter 7 and Chapter 11. Chapter 12 Bankruptcies are available exclusively to “family farmers”, “family fishermen”, and sometimes to their business entities too. It is similar to Chapter 13 Bankruptcy proceedings which are typically filed by families and consumers who want to reorganize their debt. 

Filing bankruptcy under Chapter 12 provides farmers and fishermen  who have suffered substantial financial losses and are burdened by crushing debt, the opportunity to avoid the loss of their businesses and liquidation. In most cases, they are permitted to keep their businesses, farms, boats, and valuable permits and to continue their way of life, earn income, and pay their debts over a substantial period of time  (usually between three and five years). Chapter 12 bankruptcies provide hard-working farmers and fishermen the opportunity to retain their family business and assets which were often created and preserved by decades of family effort and commitment.

Congress enacted Chapter 12 as a comprehensive restructuring option for farmers and fishermen in financial trouble to keep their businesses by reducing debt and paying the reduced amounts over time.

All farmers and fishermen must be aware of the Chapter 12 option, even if they never actually file it so they understand and use its considerable leverage when negotiating with creditors. Invoking Chapter 12 tends to level the playing field, particularly once the bank or other creditors understand that this strategic option does not require their consent to file.

To be eligible to file under Chapter 12, the total debt of the family farmer  must not exceed $10,000,000.00 and the debt of the family fisherman must not exceed $1,924,550.00. Family farmers must earn at least 50% of their income from farming operations and family fishermen must earn at least 80% of their income from commercial fishing operations 

Certain farming and fishing corporations and partnerships may be eligible for relief under Chapter 12 if they meet several criteria on the date the petition is filed. These include:  (i) more than one-half of the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives; (ii) the family or the family and its relatives must conduct a farming or commercial fishing operation;  and (iii) more than 80% of the value of the corporate or partnership assets must be related to the farming or fishing operation. 

A Chapter 12 case is initiated by filing a petition with the Bankruptcy Court, which includes: (i) schedules of assets and liabilities; (ii) a schedule of current income and expenditures; (iii) a schedule of executory contracts and unexpired leases; and (iv) a statement of financial affairs.

Filing a petition under Chapter 12 automatically stays (stops) almost all collection actions against the debtor and the debtor’s property. The automatic stay arises upon filing, no judicial action is required. When an automatic stay is in place, creditors generally cannot initiate or continue lawsuits, wage garnishments, or make any telephonic or written demands for payment.

When a Chapter 12 petition is filed, a Trustee is appointed to administer the case. The Trustee analyzes the case and acts as a disbursing agent. The trustee collects payments from the debtor and makes distributions to the creditors. 

The core of a Chapter 12 Bankruptcy is the “Plan of Repayment”. The Plan is submitted to the Court for its approval. When approved, the Plan establishes payments of fixed amounts from the farmer or the fisherman to the Trustee. The Trustee then pays the funds to creditors in accordance with the terms of the Plan. Of necessity, creditors will almost always receive less than full payment on their claims. 

The Bankruptcy Judge is responsible for deciding whether the Plan is feasible and meets the terms and conditions established in the Bankruptcy Code. Creditors have the opportunity to oppose the plan. A common objection is that the amounts to be paid under the Plan are less than creditors would receive if there was a total liquidation of the debtor’s assets or that the Plan does not require the debtor to tender all disposable income during the three-to-five year period of the Plan. Subject to certain conditions, the Judge has the discretion to amend a Plan.

A debtor doesn’t receive a discharge in bankruptcy until after all payments required under the Plan have been made. Creditors who received partial or full payment under the Plan are thereafter barred from starting or continuing any action against the debtor to collect the discharged obligations. 

If you are a family farmer or family fisherman and want more information about Chapter 12 bankruptcies, feel free to contact the Cooper Levenson Restructuring and Bankruptcy Group.

The attorneys at Cooper Levenson, PA can assist you in asset protection planning and answer any other questions you may have related to your business. Please reach out anytime to Eric A. Browndorf, Esq. at ebrowndorf@cooperlevenson.com or Kevin J. Thornton, Esq. at kthornton@cooperlevenson.com.

DO NOT FEAR, RELIEF IS HERE

March 26, 2020
Eric A. Browndorf, Esq. | Rebecca C. Lafferty, Esq.

FINALLY, some positive news for Small Business. Effective last month, a financially struggling small business does not have to choose between an expensive Chapter 11 bankruptcy or a complete liquidation under Chapter 7. Congress has tailored a quick, streamlined restructuring process for struggling small businesses with debts of less than $2.7 million.

While Congress is infusing the economy with cash in the short term, it is unlikely to be much more than the proverbial band aid. The Small Business Reorganization Act of 2019 (the “Act”) will allow many struggling small businesses to survive and flourish when the Covid-19 virus is defeated and pent up demand is released. Simply put, the Act provides a mechanism for small businesses to obtain Chapter 11 bankruptcy relief but in a more expedited, cost-efficient and debtor-friendly manner. 

What are the benefits of the Act to the small business owner?
It removes some of the procedural burdens and costs that are usually associated with a Chapter 11 bankruptcy including but not limited to: (1) shorter deadlines in order to expedite proceedings; (2) to permit debtor’s administrative expenses to be stretched out over the term of the plan and (3) the removal of the prohibition on modifying residential mortgages. The list of changes is not exhaustive of the changes

What debts are dischargeable under the Act?
A discharge will not granted until the debtor completes all payments due within the first three years of the plan (or a longer period not to exceed five years as the court may fix). The discharge applies to all debts addressed by the plan except for: (1) debts on which the last payment is due after the first three years of the plan (or such other time fixed by the court not beyond five years); or (2) debts otherwise non-dischargeable.

 How do I know if my small business qualifies to file for relief under the Act?
The Act only applies to small business owners with secured and unsecured debts of less than $2.7 million, subject to certain other qualifications. The attorneys at Cooper Levenson, PA can assist you in determining if your business otherwise qualifies to file under the Act and answer any other questions you may have related to your business. Please reach out anytime to Eric A. Browndorf, Esq. at ebrowndorf@cooperlevenson.com.

To learn more about the Bankruptcy & Financial Restructuring group click here.

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U.S. Supreme Court changes rules on IRA’s

Date: 06/16/2014
Publication: Website
CooperLevenson Publication: Website
Summary: On June 12, 2014, the U.S. Supreme Court resolved a key question that has lingered for nearly a decade: Are funds in an inherited IRA protected in bankruptcy? The answer was a unanimous, “No.”
Article: U.S. Supreme Court changes rules on IRA’s.pdf

The Art of Asset Protection

The average individual spends most of his adult life working to maintain or improve the lifestyle of his family and loved ones. Many have the foresight to create and follow strategic plans which maximize economic return on their investment of time, energy and effort. Frequently, these same individuals have the foresight to retain accountants and/or tax attorneys to minimize the amount of federal and state taxes paid annually or upon their death.

Unfortunately, few of these individuals devote any meaningful resources to
protecting these assets which they have worked so hard to enlarge. Sure, most obtain the requisite insurance to protect hard assets from fire, flood or other catastrophe. Many even obtain general liability insurance with the expectation that this will protect them from future claims by individuals injured on their residential or commercial property.

Far too few take the next step and incorporate in their business plan any
meaningful level of asset protection. In today’s litigious society, this failure can
quickly eradicate a lifetime of business and personal successes. Irrespective of the industry or profession, there exists an everpresent risk that someone will successfully convince a jury that these assets should be liquidated to compensate someone for their alleged physical or other loss.

Art of Asset Protection.pdf

Important Warnings with Respect to Property Held as Tenancy by the Entireties

Several states, including Florida and Texas, have statutory laws which prevent creditors from seizing real property held by, among others, married individuals under defined circumstances. These states explicitly make property held by Florida or Texas residents as a primary resident exempt from execution, levy and sale by a creditor.

New Jersey protects real property held by spouses that is deemed to be held as
tenancies by the entireties from the reach of one spouse’s creditors. This is designed to provide protection for the surviving spouse. Ten Eyck v. Walsh, 139 N.J. Eq. 533 (Prerog. Ct. 1947); See Also Gery v. Gery, 113 N.J. Eq. 59 (E. & A. 1933).

Each spouse is deemed to have a right of survivorship which entitles him or her to obtain the property by operation of law upon the death of the other spouse. If a creditor of one spouse obtains a judgment against the one spouse, he can execute and levy upon the interest of this spouse in the property but he cannot terminate the right of survivorship in the other spouse and force the sale or partition of the property. See Newman v. Chase, 70 N.J. 254 (1976). The creditor would have to wait for the other spouse to die before he could force the partition of the property. If the other spouse, who is not indebted to the creditor, outlives the spouse who has a judgment against him, then the creditor would lose all
interest in the property.

Important Warnings (EB).pdf

Important Warnings with Respect to Property Held as Tenancy by the Entireties

Several states, including Florida and Texas, have statutory laws which prevent creditors from seizing real property held by, among others, married individuals under defined circumstances. These states explicitly make property held by Florida or Texas residents as a primary resident exempt from execution, levy and sale by a creditor.

New Jersey protects real property held by spouses that is deemed to be held as tenancies by the entireties from the reach of one spouse’s creditors. This is designed to provide protection for the surviving spouse. Ten Eyck v. Walsh, 139 N.J. Eq. 533 (Prerog. Ct. 1947); See Also Gery v. Gery, 113 N.J. Eq. 59 (E. & A. 1933).

Each spouse is deemed to have a right of survivorship which entitles him or her to obtain the property by operation of law upon the death of the other spouse. If a creditor of one spouse obtains a judgment against the one spouse, he can execute and levy upon the interest of this spouse in the property but he cannot terminate the right of survivorship in the other spouse and force the sale or partition of the property. See Newman v. Chase, 70 N.J. 254 (1976). The creditor would have to wait for the other spouse to die before he could force the partition of the property. If the other spouse, who is not indebted to the creditor, outlives the spouse who has a judgment against him, then the creditor would lose all
interest in the property.

Important Warnings with Respect to Property.pdf