Bankruptcy

How Does Chapter 12 Bankruptcy Help Family Farms?

By
David F. Mills
on
May 24, 2019

The U.S. Bankruptcy Code recently evolved, and this time it’s positive news for family farms. Chapter 12, the portion of the Bankruptcy Code dedicated to the bankruptcy of agricultural businesses, has been amended to increase the qualifying debt ceiling from $4.1 million to $10 million - a jump that will help scores of family farms who were previously ineligible to seek bankruptcy as a debt relief option.

The U.S. Bankruptcy Code recently evolved, and this time it’s positive news for family farms. Chapter 12, the portion of the Bankruptcy Code dedicated to the bankruptcy of agricultural businesses, has been amended to increase the qualifying debt ceiling from $4.1 million to $10 million - a jump that will help scores of family farms who were previously ineligible to seek bankruptcy as a debt relief option.

The Benefits of Chapter 12 Filings for Farmers

Like Chapter 13, Chapter 12 of the Code provides reorganizational advantages and financial relief for family businesses that are steeped in debt.

While bankruptcy is undoubtedly not the best option for every farm, it is a recourse that can help financially-burdened farming operations seek relief. In fact, there are several tremendous benefits to a Chapter 12 filing.

Chapter 12 Allows Cramdowns on Secured Debts

Chapter 12 is the only chapter in the Bankruptcy Code that allows cramdowns, that is, a situation in which a debtor pays the present market value of a property rather than the entire debt during the pendency of a bankruptcy case. For instance, if a debtor owes $10,000 on a loan and the underlying asset is only worth $5,000, the debtor can “cramdown,” or reduce, that debt to a value of $5,000.

Debtors Can Propose a Long-Term Payment Plan

Through a Chapter 12 filing, debtors can propose a repayment plan to make installment payments to creditors throughout the course of 3-5 years. The creditors don’t have to approve the plan, and they are not afforded an opportunity to object. Moreover, you aren’t required to make the same payments each month - a boon for farmers with a naturally fluctuating revenue stream. Rather than adhering to a fixed payment schedule, you may align your payments with the variable nature of harvesting and selling your commodities.

You May Use, Lease, or Sell Property without Approval

Another tremendous benefit of filing under Chapter 12 is that you may use, sell, or lease your estate’s property in the normal course of business without first obtaining court approval. Specifically, if you sell farm assets, the tax claims from those sales can be treated as unsecured claims, and you may not have to pay them in full.

You May Revert to a Hardship Discharge

If you are unable to complete your repayment plan due to personal hardships or natural disasters, you may be eligible for a “hardship discharge,” which would free you of your remaining debt obligations.

Is Chapter 12 Right For Your Farm

The key benefit of Chapter 12 filings is that they are inherently more flexible than other Chapters, allowing you to make variable seasonal payments, cramdown your debts, and even seek recourse through a hardship discharge - something that can relieve the stress and pressure of maintaining a thriving farming operation while contending with a bankruptcy case.

Nonetheless, even with the recent lift on the qualifying debt cap, there are rules and regulations impacting your eligibility for this option. Additionally, this may not be the best option for you or your farm. If you have specific questions about your financial situation, be sure to speak with an experienced North Carolina farm bankruptcy attorney to evaluate the best option to help you resolve your debt and find financial freedom.

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