H.R. 5348 Would Make Chapter 12 Permanent (Written by Prof. G. Ray Warner)

HR 5348 Would Make Chapter 12 Permanent

A
bill introduced by Representative Baldwin (D-Wisconsin) on September 9, 2002,
would make the Chapter 12 “family farmer” provisions a permanent
form of bankruptcy relief and would extend the chapter’s coverage to include
“family fishermen.”
The provisions of this stand-alone bill are almost identical to the
Chapter 12 provisions of the pending Bankruptcy Abuse Prevention and Consumer
Protection Act of 2002, and the bill could provide a vehicle to enact the
Chapter 12 amendments if the comprehensive reform bill remains deadlocked. Without new legislation, Chapter 12 is
scheduled to sunset on December 31, 2002.

Like
the provisions of the Bankruptcy Abuse Prevention bill, this bill would expand
eligibility for Chapter 12 in several ways. The family farmer eligibility debt limit would increase from
$1,500,000 to $3,237,000, subject to future automatic cost of living increases
under section 104 of the Code. In
addition, the bill would reduce the percentage of liabilities that must arise
from the farming operation from 80 percent to 50 percent and would relax the
farm income requirement so that a debtor would be eligible for Chapter 12 if
more than 50 percent of the debtor’s gross income was derived from a
farming operation in either the taxable year before filing, or both the second
and third tax years prior to filing.

The new “family
fisherman” definition would apply to a debtor engaged in a commercial
fishing operation and includes requirements analogous to those in the current
family farmer definition.
Interestingly, the new family fisherman definition does not include the
relaxed standards that the bill would add to the family farmer definition. Thus, for instance, the debt
eligibility limit for family fisherman would be $1,500,000, and would not be
subject to automatic cost of living adjustments.

The
bill would make two other significant changes to Chapter 12. First, if the debtor’s disposable
income exceeded the projected disposable income upon which the plan was based,
the modification of the plan would be prospective only. The debtor could not be required to
make monthly payments that exceed current disposable income in order to make up
for the excess disposable income earned prior to plan modification. In addition, the debtor could not be
forced to increase plan payments in the final year of the plan if the
modification would leave the debtor with insufficient funds to carry on the
farming operation after the plan is completed.

The
second change would allow the debtor to treat governmental claims that arise
from the disposition of farm assets as unsecured non-priority claims. This provision would address the
problem created when the farmer recognizes a taxable gain when a
fully-encumbered, appreciated asset is abandoned, sold or foreclosed upon. The priority status of the resulting
tax liability could doom the reorganization effort if the debtor cannot pay the
liability in full within the plan period.
The amendment also appears to make such tax debts dischargeable because
the section 523(a)(1) “tax” exception to discharge refers to the
tax claims that have priority under section 507(a)(8). The provision is not limited to tax
claims and may have broader application.
However, this treatment of the claim occurs only if the debtor actually
receives a discharge.

The
amendments proposed by this bill would become effective immediately, but would
not apply to cases filed before the bill becomes effective.

Prof. G. Ray Warner, ABI Resident Scholar, Professor of Law
at the University of Missouri-Kansas City.