A Bit of History and a Brief Introduction to a Little Known Chapter of the U . S . Bankruptcy Code That Has Been Saving Family Farms for Three Decades
by Jan M . Sensenich , Chapter 12 Standing Trustee , District of Vermont
Chapter 12 of the U . S . Bankruptcy Code Turns Thirty
A Bit of History and a Brief Introduction to a Little Known Chapter of the U . S . Bankruptcy Code That Has Been Saving Family Farms for Three Decades
Sixteen years into the 21st Century , most people seem to have a greater awareness of the concept of bankruptcy than they did over three decades ago when I was relatively new to practicing bankruptcy law . The press from large cases like Enron and the City of Detroit , let alone the entire U . S auto industry , , have probably contributed to that . Many people have a general idea that Chapter 11 is something that big corporations file to reorganize . They also may know that there are much simpler cases that consumers file under Chapter 7 , where they essentially walk away from their debts and get a fresh start . If they are more sophisticated they might even know about Chapter 13 where individuals and small businesses can file a reorganization plan to keep assets and reorganize their finances . Often , for most non-bankruptcy lawyers , this is all they know or care to know about this often complex and baffling field of law .
Ask someone what Chapter 12 is and you get either a blank stare or a puzzled expression suggesting that they have never even heard of it . That is probably true of most lawyers and may even be true of practitioners who file consumer bankruptcy cases . This is probably true for several reasons . First , Chapter 12 is a relatively new creation , enacted at the end of 1986 . Second , until 2005 one could only file for Chapter 12 relief if they qualified as a family farmer . Starting in 2005 Congress extended its protection to family fishermen . Just to be clear , family fishermen are not folks that spend their weekends in waders with a fly rod , but commercial fishermen . Third , for the first nineteen years of its existence it was only temporary legislation , sunsetting several times until it was finally enacted as a permanent part of the Bankruptcy Code in 2005 . Given Chapter 12 ’ s limited applicability it is not remarkable that it has kept a low profile .
So were did this law come from ? What does it do ? And why should anyone other than a seasoned bankruptcy lawyer care ?
WHERE DID IT COME FROM ?
The nature of farming has always involved risk . Primarily , farmers live with the risks of weather - too little water or too much water , weather that is too hot or too cold . Farmers also suffer the risks of pests and diseases as well as the inherent risks of the effects of fluctuating commodities markets on the prices they get for what they grow . Sometimes political and economic events conspire to magnify these risks to farmers .
Those of us old enough to remember the 1980 ’ s may remember events like a major grain embargo where the United States curtailed shipments of grain to the Soviet Union to punish it for its invasion of Afghanistan . One might debate the effect this had on the Soviet Union , but the negative impact on U . S . Farmers and the market for grain was less debatable . The 1980s also had its share of energy cost fluctuations which started in the 1970s . During the 1980 ’ s these impacts on farmers were compounded as commodity prices fell , interest rates hit their highest levels since the Civil War and the market value of farmland when into a tailspin .
By the mid 1980 ’ s many farmers were facing an inability to obtain routine financing because the value of their land had fallen below their mortgage balances . This credit crunch kept many farmers from being able to get basic financing to operate and farms were going out of business in record numbers- further aggravating the drop in land values and the resulting farm credit crisis . Willy Nelson ’ s response was the Farm Aid Concert . The farmers ’ response was to march or to drive their tractors to Washington . The farmers demanded a response from Congress . The Congressional response to all of this , at least in the bankruptcy context , was Chapter 12 .
Before the enactment of Chapter 12 farmers could only choose to liquidate under Chapter 7 ( thus ending their farming operation ) or , if they wanted to reorganize , file under Chapter 11 . The problem with Chapter 11 is that it is prohibitively complex and expensive for small family farmers . Chapter 13 was available but most farms had far too much debt to qualify for Chapter 13 ’ s restrictive debt limits . Also , Chapter 13 did not provide the flexibility needed for farms to re-write large mortgage debt and equipment loans .
WHAT DOES CHAPTER 12 DO ?
Chapter 12 provides a level of flexibility that had never been seen in the Bankruptcy Code before . Under this chapter , farmers can re-write all of their secured debt , changing terms , interest rates and even reducing the amount of their secured debts to the value of the remaining collateral . They can do all this and unlike the more restrictive Chapter 11 , creditors do not get to vote on the plan . If the terms of the plan are supported by evidence of the value of the collateral and the interest rates are reasonable , a bankruptcy judge may confirm a plan over the objections of any or all of the creditors . This new approach took bankruptcy reorganization power to its constitutional limits--giving farmers and fishermen more power to unilaterally modify their relationships with their creditors than any other bankruptcy debtor has ever had .
In addition to this power to re-structure secured debt , Chapter 12 allows farmers and now fishermen to structure payments to match their cash flow . The payments do not have to be monthly or even quarterly . In some cases , payments are annual , depending on the debtor ’ s cash flow and production cycles . In other cases , payments increase over the life of the plan as projected changes in the operation occur .
HOW DOES IT WORK ?
As under all forms of bankruptcy relief , Chapter 12 debtors must complete a detailed bankruptcy petition , schedules and statements disclosing in great detail information on assets , debts , income and expenses , as well as information specific to the debtor ’ s farming operation . The debtor must also propose a plan of reorganization detailing payments to creditors over the three to five-year term of the plan . A Chapter 12 trustee is appointed to review the debtor ’ s petition , schedules and plan ; investigate the feasibility of the debtor ’ s plan ; and make recommendations to the bankruptcy court on confirmation .
If the plan is confirmed by the bankruptcy court , the plan is binding on the debtor and all creditors . Over the three to fiveyear term of the plan , the debtor makes payments to the trustee who then disburses payments to creditors . After a debtor completes all of the payments to the trustee over the term of the plan , the debtor receives a discharge of any unsecured debts not paid under the plan . Some secured debts will also become partially unsecured and discharged after the debtor pays the value of the collateral , but not
24 THE VERMONT BAR JOURNAL • FALL 2016 www . vtbar . org