September 29, 2005
Much has been written about the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, especially about how much more difficult and expensive it will be for debtors and for debtors’ attorneys to represent debtors. Most of the Act becomes effective on October 17, 2005. Some provisions, however, did take effect when the President signed the Act on April 20, 2005. The provisions that took effect on April 20, 2005, mostly are directed to perceived abuses concerning pre-bankruptcy planning and especially enhancement of the homestead exemption.
One can anticipate a “spike” in filings before the October 17, 2005, deadline, with a quick reduction in Chapter 7 filings after October 17, 2005. One can expect that a greater percentage of the bankruptcy cases filed after October 17, 2005, will be Chapter 13 filings. But even the rules on Chapter 13 will be more difficult. For example, the minimum repayment period will be 5-years.
There will be many unintended consequences of the Act. No doubt the fees charged by debtors’ counsel will increase. Some legal malpractice carriers have already suggested that they might need to provide special coverage for a special premium for those representing consumer debtors in Chapter 7 cases, particularly in light of the responsibility the Act will place on debtors’ counsel in verifying the information contained in the Schedules and Statement of Affairs.
There is, however, one unintended consequence of the Act that will benefit one group of debtors, “family farmers” in Chapter 12.
Chapter 12 originated in the 80’s to address what was then perceived to be a farm crisis. In general, Chapter 12 tried to make bankruptcy relief better for family farmers who wished to keep their farms and pay back a portion of their debt. Chapter 12 was much simpler and cheaper to use than Chapter 11, and had special features that made Chapter 12 better for family farmers than if they had filed an ordinary Chapter 13 case.
The problem has been that Chapter 12 was originally enacted with a 2-year sunset provision. Ever since, Chapter 12 has had to be reenacted on a periodic basis, and not always has the reenactment come in time. During these “gap” periods, debtors’ counsel have sometimes resorted to filing Chapter 13 cases to obtain the benefit of the automatic stay, all the while hoping that Chapter 12 would again be reenacted so that the Chapter 13 case for a family farmer could be converted to a Chapter 12 case.
But the Act makes Chapter 12 a permanent part of the Bankruptcy Code. In addition, the definition of “family farmer”, which provides the eligibility requirements for Chapter 12, will mean (after October 17, 2005) that an individual or individual and spouse engaged in a farming operation who’s aggregate debts do not exceed $3,237,000.00 can qualify for Chapter 12 relief. The current limit is $1,500,000.00. Also, effective October 17, 2005, only 50% of the Chapter 12 debtors’ aggregate non-contingent liquidated debts, on the date the case is filed, must arise out of a “farming operation”. The old limitation was 80%. The Act will also allow “family fisherman” to obtain Chapter 12 relief, but the debt limitations and source of income limitations for “family fisherman” will be $1,500,000.00 and 80%.
In addition, the changes the Act makes to address homestead abuse, which already took affect on April 20, 2005, will not apply in a Chapter 12 case.
Thus, there might actually be an increase in Chapter 12 filings by “family farmers” and, for the first time, “family fishermen” after October 17, 2005.
Most of the other aspects of Chapter 12 will remain the same, except holders of domestic support obligations will be greatly favored in Chapter 12 after October 17, 2005, as with other types of bankruptcy cases.
Most of the confirmation standards stay the same. For example, a Chapter 12 plan must provide for the full payment, and deferred cash payments, of all claims entitled to priority unless “the claim is a claim owed to a governmental unit that arises as a result of the sale, transfer, exchange or other disposition of any farm asset used in the debtor’s farming operation, in which case the claim shall be treated as an unsecured claim that is not entitled to priority under § 507, but the debts shall be treated in such manner only if the debtor receives a discharge”.
As with Chapter 13, a Chapter 12 plan, after October 17, 2005, may provide for less than full payment of all amounts owed for claims entitled to priority only if the plan provides that all of the debtor’s projected disposable income for a 5-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.
As before, even after October 17, 2005, the goal in a Chapter 12 case will be to reach conservative (low) values on collateral securing under secured claims and then proposing a plan that proposes to pay allowed secured claims over the longest possible time at the lowest possible interest rates, while keeping disposable earnings projections in line with the minimum payment required to unsecured creditors (at least what they would have received if the case were a Chapter 7 case) all in keeping with the over all “good faith” requirement of Chapter 12.
Some commentators have already suggested that with the increased income limitations and decreased percentage of income from “farming operations” requirements, new Chapter 12 might be used by many people who have not been able to take advantage of Chapter 12 before and who might be facing homestead planning problems with another chapter of the Bankruptcy Code. Some debtors having this problem might deliberately arrange their affairs to become “family farmers” all in order to obtain Chapter 12 relief.
It may come as a surprise to Congress that the Act actually encourages expanded debtor relief under these circumstances, particularly since almost all of the rest of the Act represents a change detrimental to most debtors and debtors’ counsel.
About the Author
Roger Minch was born and raised in Fargo, North Dakota and graduated from North Dakota State University in 1974 and The University of North Dakota School of Law in 1978. Mr. Minch joined the firm in 1978 and became a stockholder and officer in 1984. Mr. Minch's past and present activities include serving as the past chairman of the Continuing Legal Education Committee of the State Bar Association of North Dakota, and as member of the Information and Service Committee of the State Bar Association of North Dakota. He is a current member of the Bankruptcy Rules Committee of the State Bar Association of North Dakota, the Commercial Law League of America, the bankruptcy section of the Minnesota State Bar Association and the American Bankruptcy Institute. He has written numerous Continuing Legal Education outlines and text for legal seminars for the State Bar Associations of North Dakota and Minnesota, banks, savings and loans, credit union associations and private suppliers of continuing legal education programs concerning bankruptcy, collections and real estate foreclosure. His areas of concentration include bankruptcy, loan documentation, collections, foreclosures and workouts. He served as a Board member of the Fargo/Moorhead Symphony for seven years and for one year as its President. He is chairman of the North Dakota Chapter of the Nature Conservancy. Mr. Minch is licensed to practice law in all Courts in North Dakota and Minnesota and in the Eighth Circuit Court of Appeals. He is one of two North Dakota Attorneys certified as a Creditor's Rights Specialist by the American Board of Certification sponsored by the American Bankruptcy Institute and the Commercial Law League of America.