In this next installment of my Chapter 12 bankruptcy blog, I will discuss how long term farm debt can be addressed in a Chapter 12 plan. In most Chapter 12 cases, the debtors will come in to the case owing substantial debt on the farm real estate and farming equipment. How much time a farmer will have through a Chapter 12 repayment plan to pay back this debt is an issue that is critical to the success of a Chapter 12 case. Generally speaking, unsecured debt and priority debt (ex: income tax liability), must be paid within a five (5) year period. Secured debt, however, like the large indebtedness owed on the farm, can be extended out over a much longer period of time.
Let’s take an example of a poultry farm that also contains, in addition to the poultry houses, the farmer’s residential home. Let’s say further that the farmer borrowed $750,000.00 to purchase the farm 5 years ago and that debt was amortized over 15 years at an interest rate of 10%. Finally, let’s assume the farm acreage, residential home and poultry houses are now worth only $500,000.00 after the market downturn. Potentially, a Chapter 12 repayment plan could be crafted to pay the farm debt to the extent of the $500,000.00 value over 20 years at 6% interest interest, with the remaining balance treated as other unsecured debt would be treated in the plan. This could be a significant savings for the farmer and the Bankruptcy Code does allow for such treatment of long term secured debt.
There are some caveats to this type of plan treatment for long term secured debt. The proposed treatment must comply with Section 1225 of the Bankruptcy Code which requires a plan to be proposed in good faith. A bankruptcy judge will evaluate the proposed plan on this basis and, in making the good faith determination, can consider the current market for both term and interest rate. While the Chapter 12 repayment plan does not have to mirror the current market terms, a Chapter 12 bankruptcy attorney will bear the current terms in mind in crafting a confirmable Chapter 12 plan. An attorney experienced in filing Chapter 12 bankruptcies will be able to assist a family farmer or fisherman in proposing a Chapter 12 plan that can provide a long term repayment period on the farm debt while still complying with the requirement of the Bankruptcy Code. If you are considering a bankruptcy option and need assistance please contact one of our locations nearest you for a free, confidential consultation with one of our experienced, licensed attorneys.