Chapter 12 bankruptcy

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In 1986, Congress enacted chapter 12 of the Bankruptcy Code to allow farmer debtors with regular annual income to achieve debt relief. Accordingly, chapter 12 bankruptcy provides relief to debtors who qualify as family farmers and family fishermen with regular income; see In re Kerwin and 11 U.S. Code § 109. Because chapter 12 targets only a narrow class of debtors, debtors rarely utilize its relief. Nevertheless, it provides family farmers and family fishermen “a chance to reorganize their debts and keep their farms while preserving the fair treatment of creditors” see In re Pertuset.

To qualify for chapter 12 relief, the debtor must satisfy several prerequisites. Principally, the debtor must not owe more than the statutory limits prescribed by the Code, and a certain percentage of the debtor’s debts must arise out of farming or commercial fishing operations.

Chapter 12 models chapter 13, so they share many conceptual similarities; see also In re LaRosa Greenhouse, LLP.

Just as a chapter 13 debtor may shield their assets from creditors, a chapter 12 debtor can “continue to operate the farm [or fishing] business” throughout the case; see In re Eckberg. As in a chapter 13, there can be no involuntary chapter 12 case, and only the debtor may propose a plan. Also, like chapter 13 cases, a trustee is appointed, but it is the debtor, unless otherwise removed, that remains the debtor in possession and continues their farm or fishery operations. In contrast to the more complicated chapter 11 cases, there is no creditors’ committee and no preparation of disclosure statements. In chapter 12, creditors do not get to vote on the plan, and there is no absolute priority rule preventing debtors from retaining assets without full payment to creditors. See: In re Tarby and Norwest Bank Worthington v. Ahlers.

However, there are key distinctions between chapters 12 and 13. Congress sought greater rights and powers for chapter 12 debtors than under chapter 13. For instance, section 1203 provides that chapter 12 debtors in possession “shall have all the rights, other than the right to compensation under section 330, and powers and shall perform all the functions and duties, except the duties specified in paragraphs (3) and (4) of section 1106(a), of a trustee serving in a case under chapter 11, including operating the debtor’s farm or commercial fishing operation.” For supporting case law, one can look at the 2014 Wisconsin case, In re Jones, which found that chapter 12 charges debtors with the duty to perform the functions of a bankruptcy trustee. Similarly, in In re Molnar Bros., the 1996 New Jersey case held that chapter debtor 12 retained all the rights and duties of a trustee (with certain exceptions) because the debtor operated the farm as a debtor-in-possession.

Note that farmers and fishermen receive specially tailored bankruptcy relief. This is because in the original Bankruptcy Act was enacted in the late 19th century and the Great Depression followed a generation later. The 1898 Bankruptcy Act formulated the Bankruptcy Code, but critically, it failed to provide farmers special treatment other than protections from involuntary, i.e., creditor-initiated, bankruptcy. When the Great Depression hit the United States in the 1920s and 1930s, agriculture prices plunged, leaving farmers with vast amounts of debt. Across the country, farmers lost their income, their farms, and even their homes. In 1933, Congress responded by creating emergency legislation to protect farmers with an amended Bankruptcy Act.

Specifically, Section 75 of the Act targeted insolvent farmers and permitted them to propose a "voluntary composition" to the farmer's creditors. However, Section 75 did not allow a farmer to impair the lien of a secured creditor or reduce the amount of the secured claim without the creditor's consent. In reality, these limitations resulted in a relatively weak and ineffectual form of relief for farmers because most creditors retained the power to disapprove proposed compositions or extensions. Indeed, records indicate that only forty insolvent farmers sought relief under Section 75 during the eight months following its passage. In sum, Section 75 was inadequate relief in the face of the scale of debt American farmers faced during the Depression.

Subsequently, Congress strengthened the relief for farmers in 1934 through the Frazier–Lemke Farm Bankruptcy Act. The legislation was quickly challenged on due process grounds and the Supreme Court ruled in Louisville Joint Stock Land Bank v. Radford, that it deprived secured creditors of their property rightsJustice Brandeis, writing for the majority, found that the Act went too far since its "avowed object" was "to take from the mortgagee rights in the specific property held as security."

Congress revised the Act and gained the Supreme Court’s approval; see Wright v. Vinton Branch. Until the Frazier–Lemke Act expired in 1949, farmers were provided tailored bankruptcy protections, aiding the recovery of America’s agricultural industry. But in the next half of the 20th century, farmers were left with no added protections in the bankruptcy code. While most farmers filed under chapter 11 to reorganize their debts, the plan confirmation prerequisites were often insurmountable barriers to a farm reorganization. In turn, the economic turmoil experienced in the last decades of the 19th century resurfaced the unique vulnerabilities of farmers to economic downturns and the inadequacy of bankruptcy law. This prompted Congress to respond.

Congress concluded that chapter 11 was not an effective avenue for bankruptcy relief for insolvent farmers. Accordingly, Congress created a separate chapter of the Bankruptcy Code for farm debtors with the passage of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. This Act led to the modern contours and content of chapter 12.

[Last updated in July of 2022 by the Wex Definitions Team]