Editors Correction: Through no fault of the authors, the title to last week’s article Chapter 12 not Bankruptcy: It’s really a debt restructure was incorrectly printed. Chapter 12 is a form of bankruptcy. The title should have been The Basic Requirements for Chapter 12 Farm Restructure.

This article is a follow up to the last article on Chapter 12 and will discuss the Chapter 12 process. First, in Chapter 12, a petition is filed by the farmer in Federal Bankruptcy Court. A bankruptcy trustee will be then be appointed. The Trustee is there to monitor the bankruptcy. Also, the Trustee will participate in most of the hearings that are held by the bankruptcy court.

The Trustee is also in charge of ensuring that the debtor makes timely payments that are required under the plan. Unless the Court orders otherwise, the Trustee is there to ensure that payments under the plan are made to the trustee for eventual payment to creditors.

After the filing, the farmer has 90 days to submit a reorganization plan to the Court. The good news is that unlike in a Chapter 11 bankruptcy, in a Chapter 12 the farmer does not need approval of the creditors through a voting process. A party in interest can object to the plan proposed by the farmer. If this occurs, a hearing will be held where the farmer seeks court approval and responds to any of the objections. More good news is the Court must confirm the plan if the necessary requirements are met.

Confirmation requirements are contained in the bankruptcy code with the main requirements being that (a) The debtor must be sincere in his or her intention to reorganize the farming operation according to the plan and is not to be used solely to delay the creditors from enforcing their legal rights, and (b) the plan must provide for each of the secured claims. “Secured claims” are those claims that are tied to collateral by a lien, such as a mortgage on real estate. Sometimes the debtor is able to negotiate with the secured creditor as to how it will be treated under the plan.

As for unsecured creditors, the “liquidation test” required that they must be paid at least as much as they would receive if the debtor liquidated the farming operation in a Chapter 7 bankruptcy. To obtain confirmation, the plan must provide the unsecured creditors with an amount that is not less than the value of the unsecured assets, less the exempt property, as of the effective date of the plan. Valuation controls the process. So say, if liquidated, and after payments to administration cost, secured creditors, and priority creditors, general unsecured creditors would receive only $0.25 on each dollar owed, the restructure plan must provide at least that much to unsecured creditors in order to obtain confirmation.

In addition, the “disposable income requirement” holds that if the trustee or an unsecured creditor objects to the plan, either the plan must provide that the unsecured creditor will receive the full value of his or her claim, or the plan must provide that all of the debtor’s projected disposable income will be applied to make payments. The code defines “disposable income” is defined as income that is “not reasonably necessary for the maintenance or support of the debtor” and dependents and for the “continuation preservation, and operation” of the farm. An area of controversy has been determining what is necessary for continuation of the farming operation.

If the farmer can show the court that he or she can afford to make all of the payments that are required under the plan, then confirmation is likely. This is likely to require carefully prepared cash flow projections for the full term of the plan and may require the debtor to testify at the confirmation hearing. Non-farm income can be used to make plan payments and can be used to show feasibility.

Chapter 12, in many cases, allows the debtor to alter the secured debt by reducing the amount owed to the fair market value of the property, reducing the interest rate to the current market rate interest and/or extending the payment period on the debt. The debtor may be allowed to pay only a small portion of the unsecured debt.

As far as the Court’s involvement, a Chapter 12 case may last several months, up until the court confirms the plan. Generally, the terms of the plan and the involvement of the trustee will last from three to five years. As long as the farmer has complied with all aspects of the plan, at the end of the plan’s term the unsecured debt will be discharged and the trustee will be dismissed. Remaining scheduled payments will be made to the secured creditors directly.

Simplistically, the Chapter 12 process is designed to accomplish several overall results. First, it stops creditors from stepping in and taking a farmer’s assets. Second, it allows the farmer to propose a plan for restructure of the farming operation that, usually, allows for the farmer to obtain more favorable terms and conditions regarding the debt, and may even reduce the debt. Third, it gives the farmer time to repay the debts.

Safe to say, very few farmers would hesitate to try and renegotiate terms with creditors during tough times. In a sense, Chapter 12 is a tool available to the farmer to cause structured renegotiation to occur during tough times. Research suggests that some form of bankruptcy law dates back to ancient Babylon and made its way to Europe around 1542. This fact alone supports the concept of bankruptcy and the ability to provide farmers legitimate financial relief.

John J. Schwarz, II, is a lifelong farmer and has been an agricultural law attorney for 12 years. He can be reached at 260-351-4440, john@schwarzlawoffice.com, or visit him at www.farmlegacy.com

Douglas R. Adelsperger is a partner in the firm of Adelsperger & Kleven, LLP in Fort Wayne, and resides in both Allen and LaGrange Counties. Doug has practiced bankruptcy law in Northeast and North Central Indiana for nearly 30 years. He can be contacted through John Schwarz.

These articles are for general informational purposes only and do not constitute an attorney-client relationship.