Chapter 12: A Primer, Including Recent Legislation

Chapter 12 was added to the Bankruptcy Code in 1986 in response to the farm crisis of the 1980s. Chapter 12 became a permanent part of the Code in 2005. For many reasons, farmers have continued to struggle in the intervening years, causing this chapter to be more relevant than ever. In 2016, farm real estate debt surpassed the 1981 peak. In 2019, commodity prices were 50 percent lower than their peak in 2012, and the weather in 2019 — including massive Midwest floods — prevented American famers from planting 19.6 million acres of crops, more than double any other year since the U.S. Department of Agriculture began keeping track in 2007.[1]

For chapter 11 and 13 practitioners, chapter 12 will look familiar. Chapter 12 cases are typically administered by a trustee. Many districts have a standing chapter 12 trustee,[2] but others are assigned on a case-by-case basis.[3] Like chapter 13 but unlike chapter 11, chapter 12 cases proceed under the supervision of a trustee and the court until completion of the plan. Chapter 12 cases also have a debt limit of $10 million.[4] After successful plan completion, the debtor receives a discharge.[5] There is no disclosure statement[6] or voting on the plan by creditors.[7] Also unlike chapter 11, there is no absolute priority rule in chapter 12.[8]

There are also great tax advantages to chapter 12, especially since new provisions were added in § 1232 in October 2017.[9] This subsection is designed to allow a de-prioritization of capital gains taxes due on sales of assets prior to or as part of a confirmed plan. In other chapters of the Bankruptcy Code, most tax debt receives priority treatment and is nondischargeable. In chapter 12, capital gains taxes incurred either pre- or post-petition can be de-prioritized and may be discharged. This allows farmers to “right-size” their operations.[10] Perhaps most importantly, chapter 12 plans can modify mortgages on principal residences by bifurcating undersecured claims under § 506 of the Code, adjusting interest rates, and even re-amortizing mortgage loans beyond a 30-year period.[11] Additionally, debtors can restructure loans secured by equipment and livestock based on the value and the useful life of the collateral. Restructuring essentially all of a farm’s secured debt can have a dramatic impact on a farm’s debt service even when it does not involve any sale or surrender of equipment or livestock.

An additional advantage of chapter 12 is that plans are not due until 90 days[12] after the filing of the case, which allows debtors additional time after the automatic stay has gone into effect to assess claims and negotiate terms before filing the plan. Generally, plan payments in chapter 12 cases are not due until after confirmation,[13] and periodic payments can be structured around the farm’s cash-flow cycles, so chapter 12 plans may propose quarterly or even annual payments.

Eligibility to file chapter 12 is something that all bankruptcy practitioners who represent farm owners should consider.[14] While filing a chapter 12 case for a debtor who might or might not be eligible might lead to litigation, putting a debtor who is eligible for chapter 12 in another chapter might be malpractice, especially if the debtor misses out on the availability to de-prioritize capital gains taxes as noted above.

The COVID-19 pandemic added unexpected strain to farmers. When stay-at-home orders were put in place across the country and restaurants and schools were shut down, the demand for many farm products shifted faster than the processors were able to pivot.[15] Dairy farmers had to dump milk because there was a lack of bulk orders, and while there may have been grocery store shortages, it was because the supply chain was not set up to meet the increased demand for dairy products in consumer-ready amounts.[16] Similarly, produce farmers were harvesting crops and had nowhere to send them.[17]

Near the beginning of the pandemic, for cases that were filed but not confirmed, the availably of PPP loans at first seemed like a lifeline to bridge an uncertain gap. Unfortunately, farmers in bankruptcy found out quickly that the mere fact they were in bankruptcy denied them this needed relief.[18] For at least some farmers, that meant the extra hassle and expense of a voluntary dismissal, acquisition of PPP funds, and then a refile.[19] Even outside of bankruptcy, some farming operations were deemed not eligible for PPP relief. H.R. 1441, introduced in February, attempts to address this problem.[20]

The Centers for Disease Control and Prevention reports that farmers as a group have a higher suicide rate than military veterans[21] and more than twice the rate of the general population.[22] In 2008, Congress approved the Farm and Ranch Stress Assistance Network Act to provide behavioral health programs. Funding for the Act was not provided until 2019, however, but grants are being accepted now. Time will tell how effective they are.[23] For small farmers with annual income over the past five-year period of less than $300,000, the “Relief of America’s Small Farmers Act” may prove to be a lifeline as it proposes loan forgiveness of up to $250,000 in direct farm loans.[24]

Regardless of pending legislation, Chapter 12 still offers a prime solution for all parties involved by providing a way to save both the farmer and the farm and maximizing payments to creditors.