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Chapter 12 Bankruptcy

Overview to Chapter 12

Chapter 12 Bankruptcy

Frazier Lemke Act

Frazier Lemke Act

In attempts to modify the United States Bankruptcy Code over the course of American history, the Frazier-Lemke Farm Bankruptcy Act is a lesson in stick-to-it-iveness. While the Act is often cited as an important step for the recognition of the struggles of farmers in the United States, it tends to be forgotten by some that this amendment to the Federal Bankruptcy Code was invalidated in its first form.
Of course, its legacy is that of positive impact to the United States Bankruptcy Code and the urgency of the Great Depression which prompted its speedy reintroduction to the floor of Congress. Still, this should not diminish its achievements and place in the history of Chapter 12.         
The Frazier-Lemke Act is so named for its two major co-sponsors, Senator Lynn Frazier and Representative William Lemke, both from the State of North Dakota. Signed into law in 1934, the Act tackled the problem of repossession of farms by banks head on, creating debt adjustment strategies that used post-petition property values as a basis for assigning monies to be repaid to lenders, and thus, acting as a precursor to similar provisions in amendments to United States Bankruptcy Code circa the 1970s, 80s and 90s.
Like aspects of the current Federal Bankruptcy Code, the Frazier-Lemke Act spelled out circumstances by which farmers could earn up to five years of a stay of collection actions from creditors, also known as a “moratorium.”
As noted, though, the initial Frazier-Lemke Act would not last. The Act was called into question in the case of Louisville Joint Stock Land Bank v. Radford. Ultimately, the court ruled the Frazier-Lemke Farm Bankruptcy Act was unconstitutional, as it violated creditors’ Fifth Amendment rights to entitled properties (unless due process of law warranted their removal).
Soon enough, though the Federal Bankruptcy Code would be updated once more via the reformed Frazier-Lemke Farm Mortgage Moratorium Act, which lowered moratoriums to three years and gave creditors more rights to sell debtors’ lands. Once again, though, the issue of the law’s existence would be called into question in front of the Supreme Court. 
In a finding that would have a lasting effect on the future viability of Chapter 12 of the United States Bankruptcy Code, the Court ruled in 1937’s Wright v. Vinton Branch of Mountain Trust Bank of Roanoke that the new Frazier-Lemke Act was not unconstitutional, stating that during stays on collection/foreclosure, mortgages are the property of the debtor, not the creditor.

Rehabilitation or Organizations for Farmers and Fishers

Rehabilitation or Organizations for Farmers and Fishers

Chapter 12 rehabilitation for family farmers and fishermen is indeed a fairly small portion of United States bankruptcy law, but just the same, it has merit and use even today with over 400 total requests for relief under Chapter 12 a year in this country (which is more than Chapter 9 filings.
Though it may appear to some who are living amidst more industry-minded urban sectors that Chapter 12 is a product of days much gone by, perhaps surprisingly, its permanent addition to the Bankruptcy Code is quite necessary. As with Chapter 11 and Chapter 13 reorganization plans, the goal of Chapter 12 rehabilitation is not wholesale liquidation of assets, but a solution to insolvency that allows debtors to maintain their livelihood while they try to meet the bulk of their financial obligations.
While there certainly may be opportunities for negotiation of existing debts or their discharge outright under Chapter 12, pre-petition debts will not be completely negligible. In fact, part of family farmers and fishermen’s eligibility is a numerical measure of their insolvency. Fishers may not owe more than $1,642,500 to lenders, and farmers may not possess more than $3,544,525 in debts.


Purpose
Given Chapter 12’s fairly recent existence, it might not seem that there is much to consider with regard to its history. To at least a certain extent laws have been on the books since the 19th century that have given weight to farmers’ fight to remain solvent. The Bankruptcy Act of 1898, the first major piece of legislation in the history of American bankruptcy law to address the subject on a national level, mentioned relief for farmers, but only for incomes under a certain dollar amount and only for involuntary filings on the part of creditors. 
The economic struggles across the United States during the Great Depression, however, were a catalyst for a reprise of agricultural reform. Laws like the Frazier-Lemke Farm Bankruptcy Act and the Farm Credit Act of 1933 that went into effect during this time were specifically devoted to the needs of farmers.
The Farm Credit Act of 1933 was signed into law by President Franklin Roosevelt and designed as a form of emergency response, authorizing the issuance of loans, refinancing options, and low interest rates to farm owners. Unfortunately for farmers, though, these were intended to be temporary measures, and thus, required renewal to continue to make an impact.

Creation into Law
As earlier laws on relief for family farmers and fishermen were means of counteracting the dire economic circumstances of the times and of the people that suffered through these periods of hardship, Chapter 12 bankruptcy as we know it today was a response to a new time of crisis for these laborers, notably farmers. Following the Bankruptcy Reform Act of 1978, the professions of filers ceased to be recorded as part of census reports.
However, in the wake of the passage of the Bankruptcy Judges, United States Trustees and and Family Farmer Protection Act of 1986, Chapter 12 came into being. Its creation was motivated by a number of factors, including reduced marketability of agrarian products and plummeting land values.
Expectedly, the changes of the Bankruptcy Judges, United States Trustees and Family Farmer Protection Act of 1986, like their predecessors, were  not permanent and required extension to be of continued worth to family farmers. Moreover, benefits to family fishermen were still lacking in terms of the Bankruptcy Code.
With the advent of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), however, Chapter 12 officially recognized the needs of fishers for debt reorganization/assistance. Most critically, the BAPCPA turned Chapter 12 from a mere crisis intervention measure to a permanent institution and short-term option for relief from credit collections.


Frazier-Lemke Act

The original Frazier-Lemke Act, named for North Dakotan lawmakers Lynn Frazier and William Lemke, limited the ability of banks to repossess farmlands from private owners on the basis of debt incurred during the Depression and re-envisioned how debts in repayment plans should be calculated, making them concordant with their current (at the time) value. In addition, the Frazier-Lemke Act afforded debtors a five-year “moratorium” on the ability of creditors to collect on their investments in farms.
Ultimately, though, the Supreme Court found the Frazier-Lemke Act to be a unconstitutional violation of the Fifth Amendment, unlawfully keeping lenders from their due “property,” which banking standards would seem to confirm. After all, such were the consequences of defaulting on a loan.
Just the same, the circumstances surrounding the Great Depression begged clemency on the behalf of farmer-debtors. Consequently, the Frazier-Lemke Act was reformed as the Frazier-Lemke Farm Mortgage Moratorium Act in ways that were more constitutionally viable and fair to creditors.
The Supreme Court, in its majority decision in 1937’s Wright v. Vinton Branch of Mountain Trust Bank of Roanoke, confirmed the legitimacy of the Act, and likewise confirmed it would be influential in the creation of Chapter 12 down the road, serving as historical precedence.

Overview to Chapter 12

Overview to Chapter 12

It may seem as if Chapter 12 bankruptcy information might be outdated. In truth, the amount of family farmers and family fishermen in the United States altogether are not all that numerous, an idea that Chapter 12 bankruptcy statistics would tend to indicate. Nonetheless, filings under Chapter 12 still occur every year, and the American people and economy still need farming and fishing on which to subsist.         
Chapter 12 is a fairly esoteric classification for bankruptcy law. According to this subset of Title 11 of the U.S. Code, applicants must be family farmers or family fishermen with “regular annual income.” Of course, the masculine language of the law is a bit of a misnomer; a “family fisherman” may very well be a woman who is carrying on the tradition of the generations that came before her to catch and sell fish for a living.
Semantics aside, what is clear about the bankruptcy information contained within the law is that it exists for the benefit of some important American institutions. The preservation of family is recognized as increasingly essential with each passing year, and consequently, the preservation of family businesses – in agrarian industries in need of rescue no less – warrants the continued existence of a separate category for family farms/fisheries.
Though Chapter 12 law specifies that farmers/fisherman must receive regular annual income, in practice there is some leniency with regard to eligibility given the nature of these jobs. By virtue of migrative fishing patterns and growing seasons for fauna, bankruptcy courts will usually give leeway to applicants in consideration of their circumstances. All the same, some bankruptcy information will not be as readily negotiable.
Chapter 12 of the Bankruptcy Code is rather explicit about the income-based qualifications for relief. Whether a family farming or fishing operation is completely family-run or simply family-owned, total debts must not exceed $3,544,525 for the former and $1,642,500 for the latter. Additionally, in either case, farming or fishing must be at least fifty percent of a business’s activities (at least 80% for fishermen in a family corporation).

Chapter 12 Bankruptcy

Chapter 12 Bankruptcy

What is Chapter 12 Bankruptcy?
Chapter 12 Bankruptcy plans are designed for “family farmers” who receive a regular annual income. The initiative enables financially distressed family farmers (and fishermen) the ability to propose and carry out a strategy to satisfy all or part of their outstanding debts. Under a Chapter 12 filing, a debtor will propose a repayment plan, which will provide periodic installments to creditors over a period of three to five years. 
Generally, the Chapter 12 Bankruptcy filing will provide payments for the three year window; however, a court may approve a longer repayment period “for cause” purposes. That being said, unless the Chapter 12 Bankruptcy plan targets domestic support claims (i.e. alimony and child support if applicable) it must be for five years and must contain the borrower’s entire disposable income. In no case will a Chapter 12 Bankruptcy plan provide for payments beyond the five year allotment. 
How is a Chapter 12 Filing Unique?
A Chapter 12 Bankruptcy filing is tailored—according to bankruptcy law—to meet the economic realities of family farmers and family fishermen. A Chapter 12 filing eliminates a number of the impediments that these individuals face when seeking reorganization under Chapter 11 or 13 filings. For instance, the Chapter 12 Bankruptcy filing is more efficient, simpler and less expensive than a Chapter 11 filing, which should be undertaken by large corporate reorganizations. 
Furthermore, few family fishermen or famers find Chapter 13 beneficial because it is structured for wage earners who have limited or small debts when compared to those of family farmers or fishermen. With a Chapter 12 Bankruptcy filing, the United States Congress sought to combine the features of the Bankruptcy Code to provide a foundation for successful family fisherman and farmer reorganizations. 
Eligibility Requirements:
According to bankruptcy code, “family fishermen” and “farmers” are placed in two categories: 1.) the individual or individual and his or her spouse and 2.) a partnership or corporation. Fishermen or farmers who fall into the first classification must meet each of the following four criteria to qualify for relief under a Chapter 12 Bankruptcy filing:
1. The individual or spouse must be engaged in a farming operation or commercial fishing practice
2. The total debts of said operation cannot exceed $3,792,650 for a farming operation or $1,757,475 for a commercial fishing operation
3. 50% (for the farmer) and 80% (for the fisherman) of the total debts must be related to the farming or commercial endeavor
4. More than 50%–for the preceding tax year– of the worker’s gross income must have been obtained from the farming or fishing operation. 
In order to file as a partnership or corporation, the debtors must satisfy each of the following criteria:
More than 50% of the equity or outstanding stock in the entity must be owned by one family 
The family is required to conduct the commercial fishing or farming operation
More than 80% of the value of the partnership or corporation’s assets must be related to the work
The total debts of the partnership must not exceed $3,792,650 (farmers) or $1,757,475 (fishing).
More than 50%–for the preceding tax year– of the worker’s gross income must have been obtained from the farming or fishing operation. 
If the entity issues stock, it may not be publicly traded
It may not be immediately clear why Chapter 12 is even needed in the Bankruptcy Code. Obviously, the goal of bankruptcy applicants and bankruptcy courts are to ensure debts are discharged. Chapter 12 might truly be a better solution for family farmers and fisherman than other bankruptcy options.
Though depending on the circumstances, Chapter 12 bankruptcy is apt to be a better fit for these populations than Chapter 11 relief, as the fees are much less expensive under Chapter 12 and the process runs more smoothly than in Chapter 11, which is arguably quite complex. Compared to Chapter 13, meanwhile, Chapter 12 bankruptcy is usually a superior option for fishermen/farmers, as they are more likely to accrue bigger debts than those who traditionally file for Chapter 13 bankruptcy.
Despite not being a major tenet of Chapter 12, added protections for family farmers and fishermen may be thrown in with contemplations of the purpose of this subset of bankruptcy law. Any projections or estimates of the income debtors should make in coming years are just that, and depend on stable, amenable environmental conditions. In the event of a natural disaster or some other sort of ecological change that negatively impacts farmers or fishermen and is beyond their control, Chapter 12 bankruptcy proceedings may result in a “hardship discharge” of some debts owed.