H.R. 5348 Would Make Chapter 12 Permanent (Written by Prof. G. Ray Warner)

HR 5348 Would Make Chapter 12 Permanent

A bill introduced by Representative Baldwin (D-Wisconsin) on September 9, 2002, would make the Chapter 12 “family farmer” provisions a permanent form of bankruptcy relief and would extend the chapter’s coverage to include “family fishermen.” The provisions of this stand-alone bill are almost identical to the Chapter 12 provisions of the pending Bankruptcy Abuse Prevention and Consumer Protection Act of 2002, and the bill could provide a vehicle to enact the Chapter 12 amendments if the comprehensive reform bill remains deadlocked. Without new legislation, Chapter 12 is scheduled to sunset on December 31, 2002.

Like the provisions of the Bankruptcy Abuse Prevention bill, this bill would expand eligibility for Chapter 12 in several ways. The family farmer eligibility debt limit would increase from $1,500,000 to $3,237,000, subject to future automatic cost of living increases under section 104 of the Code. In addition, the bill would reduce the percentage of liabilities that must arise from the farming operation from 80 percent to 50 percent and would relax the farm income requirement so that a debtor would be eligible for Chapter 12 if more than 50 percent of the debtor’s gross income was derived from a farming operation in either the taxable year before filing, or both the second and third tax years prior to filing.

The new “family fisherman” definition would apply to a debtor engaged in a commercial fishing operation and includes requirements analogous to those in the current family farmer definition. Interestingly, the new family fisherman definition does not include the relaxed standards that the bill would add to the family farmer definition. Thus, for instance, the debt eligibility limit for family fisherman would be $1,500,000, and would not be subject to automatic cost of living adjustments.

The bill would make two other significant changes to Chapter 12. First, if the debtor’s disposable income exceeded the projected disposable income upon which the plan was based, the modification of the plan would be prospective only. The debtor could not be required to make monthly payments that exceed current disposable income in order to make up for the excess disposable income earned prior to plan modification. In addition, the debtor could not be forced to increase plan payments in the final year of the plan if the modification would leave the debtor with insufficient funds to carry on the farming operation after the plan is completed.

The second change would allow the debtor to treat governmental claims that arise from the disposition of farm assets as unsecured non-priority claims. This provision would address the problem created when the farmer recognizes a taxable gain when a fully-encumbered, appreciated asset is abandoned, sold or foreclosed upon. The priority status of the resulting tax liability could doom the reorganization effort if the debtor cannot pay the liability in full within the plan period. The amendment also appears to make such tax debts dischargeable because the section 523(a)(1) “tax” exception to discharge refers to the tax claims that have priority under section 507(a)(8). The provision is not limited to tax claims and may have broader application. However, this treatment of the claim occurs only if the debtor actually receives a discharge.

The amendments proposed by this bill would become effective immediately, but would not apply to cases filed before the bill becomes effective.

Prof. G. Ray Warner, ABI Resident Scholar, Professor of Law at the University of Missouri-Kansas City.