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gages secured by the farm land , farm mortgages can be re-written in this manner with the result of the farm operation saving hundreds of thousands of dollars . The justification is that a secured creditor is only truly secured , rather than unsecured , like credit cards , to the value of its collateral .
( 2 ) Extension of the Loan ’ s Repayment Term
This concept allows a farmer to re-write the outstanding balance of a loan , as if it were a brand new loan , for a term which would be reasonable considering the nature of the collateral and its remaining useful life . With respect to real estate loans , this can potentially allow a debtor to reamortize a mortgage that may be halfway through its term , to a full mortgage term . For example , if a 30-year mortgage is half-way through its payment term , the outstanding balance could be re-written for another fuly 30 year ( or perhaps even longer ) term . This approach is sometimes available with respect to equipment loans and cattle loans , but since the term of the re-written amortization is limited to the useful life of the collateral , those loans are not typically longer than the 5-year term of a Chapter 12 plan .
( 3 ) Reduction of the Interest Rate
Probably the simplest way to reduce debt service on a loan is to merely reduce the interest rate on the outstanding balance . Under the U . S . Supreme Court decision , Till v . SCS Credit Corp ., 541 US 465 ( 2004 ), the applicable interest rate for a reorganization plan may well be less than the contract rate which a debtor is obligated to pay under the promissory note . Under the Till case , the debtor may have the interest rate reduced to the prime rate plus a 1-3 % risk factor , with the actual interest rate being determined by the facts of each case . Very often the Till rate is quite a bit less than the contract or note rate , although this is not always the case .
Combined Impact
Although each of these three approaches to loan restructuring could be used independently , the most common approach is to use all of them . This allows the debtor to re-write loan obligations to significantly lower periodic payments . For example , if a mortgage loan in the original amount of $ 600,000 has an outstanding balance of $ 400,000 , and the collateral securing it is only worth $ 300,000 , the Chapter 12 plan will require the debtor to repay only $ 300,000 , not $ 400,000 . Additionally , if the original loan was to be paid over a 30-year
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term and was taken out 15 years ago , the remaining ( now crammed down ) balance of $ 300,000 could be re-amortized out to 30 years . Finally , although the promissory note interest rate may have been 7 %, the debtor may re-compute the interest rate and amortize the $ 300,000 , over 30 years , with a lower , interest rate , perhaps as low as 4.5 %. The combined impact of these three changes is to take a loan that had monthly payments based on a $ 600,000 original loan , amortized at 7 % and re-write it into a new 30-year loan for $ 300,000 at 4.5 %. Needless to say the impact of such modifications can be significant .
How are Priority Unsecured Debts Treated ?
In addition to secured debt , some farms have debts which are classified by the Bankruptcy Code as priority unsecured debts . Such debts must be paid in full in Chapter 12 Plans even though they are not secured by any lien or collateral . The most common of these are state and federal tax debts . Typically , a Chapter 12 Plan will pay priority unsecured debts over the life of the Plan along with secured claims . This can present a serious limitation for Chapter 12 debtors , in an otherwise seemingly limitless chapter . How are Unsecured Non-priority Debts Treated ?
Finally , debts which are neither secured by collateral nor classified as priority debts are referred to as general unsecured debts . This category includes credit card debt , repair bills , medical bills and feed bills that have not been reduced to judgment liens . General unsecured debt is any type of debt that is unsecured and does not fall under a list of priority debts made up primarily of support payment and taxes . Whether or how much the debtor must pay to the holders of unsecured debts depends on the debtor ’ s income and expenses , as well as the value of the debtor ’ s non-exempt assets . The Bankruptcy Code allows debtors to “ exempt ” certain assets , and those assets are not included in the computation of the dividend a debtor must pay to the holders of general unsecured claims . In the event the debtor claims most of the equity in his or her assets as exempt , the dividend the debtor would be required pay to the unsecured creditors would be a small percentage of what is owed , with the balance of the claims being discharged at the end of the case . By only paying part of the total of the unsecured claims , the Plan can enable debtors to obtain relief from crushing unsecured debt loads while simultaneously significantly reducing the required monthly payment on secured debt , and get the “ fresh start ” the Bankruptcy Code offers .
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Illustration
The attached chart demonstrates the combined impact of the modification of several secured farm loans , including several mortgages , equipment and cattle loans . In this example the pre-bankruptcy debt service on all secured loans and payments on unsecured debt ( spread over 3 years ) was over $ 17,000 per month . After the loans are modified by a Chapter 12 Plan , a modest dividend to unsecured creditors is added ( 8 %) and the Chapter 12 Trustee fees are added in , the monthly debt service drops to below $ 8,000 per month , a savings of nearly $ 9,000 per month , $ 108,000 per year or potentially $ 540,000 over the life of a 5year plan .
What Can Chapter 12 Not Do ?
Chapter 12 is not a government program nor is it charity . It is a legal tool which is part of the U . S . Bankruptcy Code designed to help financially struggling small farmers reorganize their debt in order to keep farms in business . The policy is that keeping well managed and productive farms in business is good for our country , our state and our communities . The farm economy is a crucial component of the national and local economies and even more importantall of us are fed by what farms produce .
What Chapter 12 cannot do is turn a poorly run or mismanaged farm into an efficient , productive farm . The mere reorganization of debt is no guarantee of success for farms that have serious management issues or lack the productive resources to farm efficiently . Evaluating whether Chapter 12 is the right choice for a farm in need of financial reorganization requires a careful assessment of whether a farm has sound management and the necessary resources ( productive land , equipment and labor ) to perform under a Chapter 12 reorganization plan . Chapter 12 is probably not the answer for every struggling farm , but when a farming operation needs a financial second chance , it can serve as a unique and powerful tool to reorganize farm debt and provide a financial fresh start .
WHY SHOULD ANYONE BUT A BANKRUPTCY LAWYER NEED TO KNOW ANYTHING ABOUT CHAPTER 12 ?
Most farmers are likely to have more contact with non-bankruptcy lawyers for such things as real estate transactions , leases , estate planning tax services and many other types of work . The perception that bankruptcy means liquidation and the end of the farming operation will be enough to discourage most farmers from even attempting to contact a bankruptcy lawyer ,
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