Chapter 12 – Special Bankruptcy Protection for Farmers and Fisherman
April 2018
By: Darya Druch, Attorney at Law
In light of difficult financial times and land value fluctuations Farmers and Fishermen and Fisherwomen may find themselves unable to make the mortgage payments on a home, farm equipment, vessel, vehicle, or farm; or there is a large balloon payment looming in the near future. This might be a good time to consider filing for Chapter 12 bankruptcy. This is a legal option which is particularly attractive to Family Farmers and Fisherman for whom a special kind of Bankruptcy was created. Farmers or Commercial Fisherman and Fisherwoman, have special rights that can be of great help by restructuring and even eliminating debt entirely.
Under the current federal law, Farmers and Fisherman can file a special type of bankruptcy, known as Chapter 12. There are debt limits and 80% of the debts (not including the residential mortgage (unless related to the fishing / farming operation) must be related to the operation. Also, the commercial farming / fishing operation (including partnerships and corporations) must account for more than 50% of the preceding year’s gross income.
The absolutely most important feature of a Chapter 12 is that secured debt (meaning mortgages on house, vessel, vehicle, or anything else) can be re-written for up to 40 years. The reduced payments continue after the bankruptcy is over. Better yet, if the collateral is worth less than the debt (“under water”), the total amount that will have to be paid back can be “crammed down” to the value of the asset and paid back over the new longer term. For example, if a farm with the $500,000 loan is worth only $300,000, the loan can reduced to $300,000. There is also the option of just returning or surrendering the asset if it is no longer wanted or needed. In this situation any balance owed will be treated as an unsecured debt that will be discharged. / eliminated under certain cirumstances.
Another side benefit of a chapter 12 is that if friends or family co-signed the loan, they too are protected from any collection activities if the Debt is being paid through the Chapter 12 Plan.
A warning – if the creditors can prove that gross mismanagement is taking place or that there is no likelihood of rehabilitation – they can move to have the case dismissed. Also, expect a fight with the Bank or the Trustee as to whether you meet the requirmeents based on percentages and type of income (we know that while raising animals is farming, boarding horses is not). Also expect a fight from the Bank regarding the valuation of the collateral. A recent case I just concluded in Northern California involved a demonstration farm and raising of animals for pony rides and petting zoos. In that case a home loan for the farm was reduced by over $200,000 to account for the lower property value, and a second mortgage was eliminated entirely. The whole process took 6 months.
In addition to the re-writing of the secured debt, all the unsecured debt can be discharged after making payments for 5 years depending on assets and income. Even some taxes (especially if old enough and retruns filed) can be discharged. What generally cannot be discharged are certain type of taxes, last 3 years of taxes, money obtained by fraud, embezzlement or larceny, back child or spousal support, government fines, student loans, damages from intentional torts or drunk driving. There are other exceptions, but these are the most common.
There are many other issues to consider and this article is not intended to provide individual legal advice. The information is meant to give the reader a flavor of what a chapter 12 bankruptcy can do and to encourage the reader to seek legal advice if in financial difficulty. If you would like to explore this option, contact a knowledgeable Bankruptcy Attorney hopefully BEFORE the balloon payment is due. Perhaps your personal situation is better suited to one of the other Bankruptcy options. Be sure to tell your Attorney about ALL your debts and assets, no matter how trivial or insignificant you think that information may be. Good Luck
Darya Druch has been a bankruptcy attorney in the SF Bay Area since 1988 and has represented debtors, creditors and trustees. Darya Druch is a Debt Relief Agency authorized to file Bankrutpcy cases before the United States Bankruptcy Courts. Darya Druch can be contacted ar darya@daryalaw.com or via her website www.daryalaw.com.
