Today, I’m going to turn our attention to Chapter 12 farm bankruptcies and discuss three things you should know about them.
1. Chapter 12 Filings have been down over the past few years – but beware.
Generally, Chapter 12 filings have been down about 25% over the past few years in large part because the commodity prices have been higher than they have been in prior years. While it would be nice for farmers and their creditors if this continued, we all know that it’s difficult to predict the commodity prices for next month, let alone for next fall and winter.
It is also expected that “input” prices for such things as feed, seed, fertilizer and fuel will go up in 2022. If these prices go up significantly, and the commodity prices drop, our family farmers could be in a very difficult position.
2. Ch. 12 provides very favorable options to the Debtor for repayment of secured debt
One of the biggest options that Ch. 12 provides to family farmers is the ability to modify the terms for payment of secured debt.
One thing a Chapter 12 Debtor can do specifically with secured debt is what’s called a “Cram down”.
Generally speaking, in a case where the amount of a secured creditor’s claim is substantially more than the value of the collateral which secures this claim, the Debtor can reduce the amount of the creditor’s secured debt to the market value of the collateral and then propose to pay that amount off through terms set forth in the Plan.
Any amount of the secured creditors debt that is not paid is treated as an unsecured, non priority debt which are often discharged after the Debtor pays only a small portion of these claims.
So this is probably the most significant thing a Chapter 12 bankruptcy debtor can do to reorganize.
3. Ch. 12 provides a major tax benefit for Debtor’s who sell farm property in a Chapter 12 bankruptcy case
Prior to 2017, if a Chapter 12 farm debtor wanted to sell farm property, the sale of the farm property would often result in very high capital gains taxes which the Debtor would have to pay in full as a priority claim in the bankruptcy
In 2017, The Family Farmer Bankruptcy Clarification Act was enacted which provided among other things taxes resulting from the sale of farm property occurring before discharge can be treated as an unsecured, non-priority claim (i.e. just like typical credit card debt). As I noted above, unsecured, non-priority creditors often receive only pennies on the dollar in Ch. 12 Plans.
So instead of having to pay these capital gains taxes in full over the life of the Plan, the Chapter 12 bankruptcy debtor may instead pay a very small amount of this claim and then get a discharge.
This is typically a HUGE benefit to Ch. 12 debtors to be able to treat the taxes arising from the sale of farm property as not having any priority.