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 firstname.lastname@example.org or Kevin J. Thornton, Esq. at email@example.com.