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Old and New Bankruptcy Code Issues Under Chapter 12
by Jeff Mollet

Bankruptcy is an ugly word to most businesses because it means a loss on an account that cannot be recovered in most cases. Bankruptcy is an ugly word to many attorneys because it presents a confusing group of statutes and rules that are difficult to decipher and understand. Thus, many businesses and attorneys avoid bankruptcy issues, sometimes to almost absurd lengths. For example, one of the most surprising trends in recent bankruptcy cases is the lack of claims being filed. I guess that many creditors simply think they won’t get paid so they do not take the time to file a claim. The end result is that the bankruptcy trustee must often try to solicit enough claims to cover the money received so that the excess is not returned to the debtor. The moral of the story here is to always file a claim.

You might want to be aware of some new bankruptcy provisions as well as refresh your memory on some old ones. Here are a few.

The new stuff. Recent changes to the Federal Bankruptcy Code made by the bankruptcy bill may be of interest to many of you. These include changes to the provisions of Chapter 12, some of which could affect your business and the decisions you may be faced with in the future when granting credit to your customers.

First and foremost, the limitations of a farmer or entity to qualify for Chapter 12 relief have been changed. These revisions reflect a recognition by Congress of the increased size of the typical farming operation and the increase in the debt required to operate such a business. Farmers or farming entities who meet the following may now qualify:

A. Individual or individual and spouse whose:
1. Aggregate debts do not exceed $3,237,000 (up from $1,500,000)
2. Not less than 50 percent of aggregate non-contingent liquidated debts (other than the residence of the farmer) arise out of farming operations
3. 50 percent of gross income is received from farming operations for the
a. Tax year preceding, or
b. Each of the second and third tax years preceding filing
A qualified corporation, whose
1. Aggregate debts do not exceed $3,237,000
2. Not less than 50 percent of aggregate non-contingent liquidated debts (other than the residence of the farmer) arise out of farming operations (Family Farmer §101(18))
These are significant increases over the old threshold of $1,500,000, and many of your bigger clients may now be in a position to take advantage of the protection afforded by Chapter 12.

B. Under the revisions, “disposable income” is now defined to specifically exclude domestic support obligations coming due post-petition. Thus, if you are relying on domestic support as part of a customer’s income for purposes of granting them credit, that money may not always be available to pay the customer’s debts if a bankruptcy arises.

C. There are some good items for creditors. Generally, the debtor may not receive a discharge if there is an action pending in which the debtor may be found:
1. guilty of a felony, or
2. liable for a debt arising from Violation of Federal Securities Exchange Act or similar state law criminal act, intentional tort, or willful or reckless misconduct causing serious physical injury or death to individual.

Some nifty old stuff. The new provisions are in addition to some long-standing rules protecting creditors. The first allows a creditor to object to the dischargeability of a debt where, for example, the debtor has made false representations on a financial statement to obtain credit.

In addition, a secured creditor has a right to demand “adequate protection” of its collateral, whether that collateral is cash or an asset that can be converted to cash. Before “using” the collateral, a debtor must obtain court approval if the creditor can prove that the use will result in a decrease in the value of the collateral. In such instances, the debtor will be required to “protect” this decrease by providing for a way to compensate the creditor.

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