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Chapter 12?

On Behalf of | Dec 4, 2018 | Guidance

Most people think Bankruptcy falls under either Chapter 7 or Chapter 13. These are the basic consumer formats. Chapter 7 is basically a straight liquidation of non-exempt assets; while Chapter 13 supposedly allows a debtor to retain non-exempt assets through what is essentially a “buy-back” plan over a 3 to 5 years period.

Some people (especially small business owners and high net worth individuals) are also aware that there is something “out there” called Chapter 11, of which there is even less known.

Chapter 11 is similar to Chapter 13, however it provides for a special set of rules and longer periods of time to deal with the much larger issues usually associated with these larger cases.

Mention Chapter 12 however, and most likely you will get blank stares and /or questioning double takes. Enacted in October of 1986 and effective that November, Chapter 12 is directed to Farmers and Fishermen, essentially because of the unique nature of their structure and providers of the nation’s breadbasket.

It came about in response to the “Farm Crisis” of the time which was causing a rapid collapse in Family Owned Farms.

Passed almost as an after thought in wrapping up that year’s legislative session, little thought was given to how the existing bankruptcy code would interface with the new provisions, particularly in regards to “the absolute priority rule,’ concerning capital gains taxes when large assets were sold in downsizing operations.

On October 26, 2017, President Trump signed Pub. L. 115-72, thus allowing family farmers to “de-prioritize” tax claims, effectively making them unsecured claims, unlike most tax claims in other Chapters of the Bankruptcy Code.

Effectively, the new rule serves to relieve the effects of capital gains that result when large farming equipment and other high cost assets are sold to in order to pay dividends to lesser priority classes. It stops the IRS from objecting to confirmation of a plan, thus avoiding forced liquidation and allowing survival of the enterprise.

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