Vermont Bar Journal, Vol. 40, No. 2 Vermont Bar Journal, Fall 2016, Vol. 42, No. 3 | Page 25

(1) Farming – activities involving the tillage of soil and raising of crops, raising of livestock or poultry or livestock
products in an unmanufactured state;
(2) Family Farmer Test (Individual or Individual and Spouse)(a) Debts not over $4,031,575 (as of
2016);
(b) At least 50% of debt is farm related debt (does not include home
mortgage, unless the mortgage is
a farm mortgage);
(c) More than 50% of debtor’s income is from farming (measured
by the previous tax year or the two
tax years before the previous tax
year).
(3) Family Farmer Test (Corporation)(a) 50% of shares owned by one fami-

www.vtbar.org

ly or by one family and farming relatives;
(b) Over 80% of the value of the corporate assets consist of assets related to farming;
(c) Debts not over $4,031,575 (as of
2016);
(d) At least 50% of debt is farm related debt;
(e) Corporation is not publicly traded.
The test for a “family fisherman” is similar except for the operation must consist of
a commercial fishing operation and the aggregate debts cannot exceed $1,868,200
(2016).
The above analysis is a simplification of
the statutory language, however meeting
the definitions is critical for a debtor needing relief under Chapter 12. Since Chapter
12 is a powerful tool that can force creditors to accept reorganization terms that
they would frequently not agree to voluntarily, creditors often have a strong incentive to litigate Chapter 12 eligibility whenever it seems like a close issue. For this
reason, anyone considering filing for Chapter 12 relief, or any counsel representing
them, must take a close look at each of the
definitions and make sure the debtor can
prove eligibility.
How do Chapter 12 Plans
Reorganize Farm Debt?

Chapter 12 Plans provide a tremendous
amount of flexibility in addressing secured
farm debts such as equipment loans and
mortgages. First, plans do not necessarily require monthly payments (as Chapter
13 does). Chapter 12 plans may be funded by annual payments, semi-annual payments, quarterly payments or monthly payments. This generally depends on the type

THE VERMONT BAR JOURNAL • FALL 2016

of farming operation. Farms with regular
monthly income such as dairy farms typically provide for monthly payments. Farms
with annual crops, such as orchards, Christmas tree farms, maple sugaring operations
or other farms with annual crops typically
call for annual payments corresponding to
the timing of the sale of the annual harvest.
There are also other options, such as variable monthly payments based on a farm’s
projected annual cash flow.
Chapter 12 Plans provide at least three
different options for reorganizing farm
debt, each of which helps to reduce the required monthly debt service on farm loans.
These options are: (1) reduction of the loan
balance to the value of the collateral; (2)
re-writing the terms of the loan to extend
the repayment period and re-amortize the
debt; (3) reduction of the interest rate.
Each of these modification options has the
power to significantly reduce the monthly
payment on a loan and the farmer’s overall
monthly debt service. When used in combination to restructure several loans, the
impact can be fairly dramatic.

Chapter 12

the debt in full. Typically plans call for payments of long term secured debts, such as
mortgage debt, after the conclusion of the
plan, which the debtor then pays directly
to creditors. Who is Eligible to be a Chapter 12 Debtor?
Title 11 of the U.S. Code at Section 109
(f) states: “Only a family farmer or family
fisherman with regular annual income may
be a debtor under chapter 12 of this title”.
Section 101 (18) and (19A) of Title 11 contain the definition of “family farmer” and
“family fisherman”. Sections (19) and (19B)
contain the definition of “family farmer with
regular annual income” and “family fisherman with regular annual income. Subsection (21) of that section also includes a definition of “farming operation”. A reliable
determination of whether a specific individual, individual and spouse or corporation is eligible to file Chapter 12, requires
a careful look at each of the above definitions. That said, the requirements essentially come down to the following:

(1) Reduction of Loan Balances
(cram-down)

The concept behind this approach is that
if a loan is under-secured (meaning the collateral is worth less than the amount outstanding on the loan secured by it), the
loan should be re-written for a principal
balance of no greater than the value of the
collateral. For example, if a tractor is collateral for a $40,000 loan, and the tractor is
only worth $30,000, the loan should be rewritten as a $30,000 loan. In this case, the
debtor would save $10,000, plus the interest on that sum, over the life of the loan.
In cases where the value of the real estate
is less than the amount due on the mort-

25