Many farming or fishing operations face difficulties year-round, often from the financial conditions that have worsened over the last few years. Low farming and fishing commodity prices and volatile weather conditions have become major challenges, especially for family-owned operations. Due to these problems and more, the rate of family farmer and fisher bankruptcies has gradually increased over the years, and in 2020, hit its highest peak since the Great Recession in 2007–2009. While some cases of farmer or fisher bankruptcies are liquidation bankruptcies that effectively end business operations, the majority of family farmer and fisher bankruptcies are reorganization cases that help filers get back on their feet financially and find permanent debt relief. If you are considering filing a Chapter 12 bankruptcy in Mankato, MN, or the surrounding area to resolve debts and stabilize your family’s farming or fishing operations, Behm Law Group Ltd. can provide legal support and guidance.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy is similar to Chapter 13 wage-earner consumer bankruptcy. Both reorganize the filer’s debts into a manageable repayment plan lasting three (3) to five (5) years, both can provide for the repayment of secured loans under adjusted and more favorable terms, and both will provide for at least some minimal payment to unsecured creditors – usually 10% to 25% of what was originally owed to those unsecured creditors. Another factor they have in common is that filers will be required to dedicate all their available disposable income – income left over after reasonable and necessary living and business expenses are paid – to making payments in a chapter 12 or chapter 13 repayment plan.
Differences Between Chapter 12 and Chapter 13
Yet, there are several differences between Chapter 12 and 13, with the main one being repayment plans and the ways filers make payments. Chapter 13 plans require monthly payments to the bankruptcy trustee, but family farmers and fishers often have incomes that fluctuate with the seasons, so a monthly payment plan can be hard to maintain. Therefore, Chapter 12 plans can allow for seasonal payments or bi-annual payments or even one large yearly payment.
Also, Chapter 12 is different from Chapter 13 in that past production expenses and past incomes from previous years can be considered when a chapter 12 repayment plan is drafted and submitted to the bankruptcy court. This gives chapter 12 debtors more control over the repayment terms of their various debts in the repayment plan.
During their Chapter 12 repayment period, family farmers or fishers can also sell property designated as “farmland or farm equipment” without negatively impacting their repayment plan and without necessitating higher plan payments to the chapter 12 trustee. This helps farmers and fishers in Chapter 12 bankruptcy pay down their debts and clear secured liens faster.
For farmers selling assets/property during their repayment period, there are also some tax advantages. Taxes from the capital gains of the sales of equipment or real estate are treated as unsecured debts, like credit card debts or medical debts, in a chapter 12 case. Presume a farmer purchased a combine for $100,000 and then sold it for $150,000 while in a chapter 12 bankruptcy. Any income tax debt as to the $50,000 capital gain from the sale would not have to be paid to the Internal Revenue Service (IRS). Rather, the tax debt from the sale would be treated and paid as an unsecured debt.
Through Chapter 12 bankruptcy, farmers and fishers also get the benefit of “cramdown”, which means they can cram down the amount of debt on a particular secured loan to the present value of the property item that serves as collateral for the loan. For instance, presume that a farmer purchased a pickup truck two (2) years ago for $50,000. Presume that the loan for the pickup truck had an interest rate of 15%. Presume further that the farmer presently owes $45,000 and that the pickup truck is presently worth $30,000. In a chapter 12 repayment plan, one can cram the $45,000 debt down to the present $30,000 value of the pickup truck and one can also cram down the accompanying interest rate from 15% to 5%.