Order Code RS20742
Updated February 6, 2004
CRS Report for Congress
Received through the CRS Web
Chapter 12 of the U.S. Bankruptcy Code:
Family Farmer Reorganization
Robin Jeweler
Legislative Attorney
American Law Division
Summary
Chapter 12 of the U.S. Bankruptcy Code, dealing with “family farmer”
reorganization, expired on January 1, 2004. In the absence of chapter 12, insolvent
farmers’ bankruptcy options include reorganization under chapter 11 or 13, or
liquidation under chapter 7.
The most recent temporary extension of chapter 12 was effected by P.L. 108-73,
which was retroactive to the previous extension through July 1, 2003.
The 107th Congress enacted five temporary extensions of the chapter. P.L. 107-
377, extended chapter 12 through July 1, 2003. P.L. 107-170 extended chapter 12
through June 1, 2002. It was signed by President Bush on May 7, 2002. P.L. 107-171,
the Farm Security and Rural Investment Act of 2002, was signed by the President on
May 13, 2002. With the exception of P.L. 107-377 and P.L. 107-171, which applied
the extension prospectively, prior temporary extensions were applied retroactively.
Retroactive reinstatement was intended to benefit debtors who may have filed under
alternative chapters of the Code during a period when chapter 12 was not in effect who
wanted to convert their cases to chapter 12. On May 5, 2001, President Bush signed
P.L. 107-8 which extended chapter 12 through June 1, 2001. On June 26, 2001,
President Bushed signed another extension, P.L. 107-17, which extended chapter 12
through October 1, 2001.
Background. In 1986, Congress added chapter 12 entitled “Adjustments of Debts
of a Family Farmer with Regular Annual Income” to the U.S. Bankruptcy Code.1 It is
modeled after chapter 13, which governs consumer reorganization. Chapter 12 was
created to provide farmers with the opportunity to reorganize and thus to preserve their
farms through a streamlined and expeditious bankruptcy process. Intended to respond to
1 P.L. 99-554 (Oct. 27, 1986).
Congressional Research Service ˜ The Library of Congress

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the downturn in the farm economy in the 1980's, it was considered “experimental.”2
Originally enacted as a temporary measure with a sunset date of Oct. 1, 1993,3 it was
subsequently extended ten times.4
In the absence of chapter 12, insolvent farmers’ bankruptcy options include
reorganization under chapter 11 or 13, or liquidation under chapter 7.5 Chapter 11
governs business reorganization and is more expensive and procedurally cumbersome
than chapter 12 or 13. Chapter 13 is designed for “individuals with a regular income” or
wage earners. The nature of farming is such that many farmers do not realize income on
a “regular” schedule comparable to that of wage earners. Also, many farms are not
individually owned, but are operated as corporations or partnerships. And, when chapter
12 was enacted in 1986, chapter 13 had a jurisdictional debt limit of $350,000 in secured
debt and $100,000 in unsecured debt. Farmers’ indebtedness often exceeded that limit,
so chapter 12 provided a jurisdictional debt limit of $1,500,000. In 1994, however,
chapter 13 was liberalized; the limit is currently $871,550 in secured debt and $290,525
in unsecured debt.
Procedural overview. The goal of chapter 12, indeed of all the operative
bankruptcy reorganization chapters, is to offer a debtor a means of financial rehabilitation
outside of liquidation. Historically, the quid pro quo for reorganization is the debtor’s
obligation to commit postbankruptcy income to prebankruptcy indebtedness.6
Definition of “family farmer.” For chapter 12 purposes, a family farmer includes
an individual and spouse, or a family-owned partnership or corporation, with debts of less
than $1,500,000, eighty percent of which arises from the farming operation. The debtor
must derive at least fifty percent of gross annual income from farming.7
Expedited time frame. A chapter 11 debtor has at least 120 days (four months)
after filing to submit a proposed reorganization plan. A family farmer must submit a
proposed plan within 90 days of filing,8 and the court must hold a confirmation hearing
2 H.Rept. 103-32, 103d Cong., 1st Sess. 3 (1993).
3 P.L. 99-554, §302(f).
4 P.L. 103-65 (extension through Sept. 30 1998); P.L. 105-277 (extension through April 1, 1999);
P.L. 106-5 (extension through October 1, 1999); P.L. 106-70 (extension through July 1, 2000);
P.L. 107-8 (extension through June 1, 2001); P.L. 107-17 (extension through October 1, 2001);
P.L. 107-170 (extension through June 1, 2002); P.L. 107-171 (extension through January 1,
2003); P.L. 107-377 (extension through July 1, 2003); and P.L. 108-73 (extension through Jan.
1, 2004).
5 Farmers may not be forced into bankruptcy involuntarily. 11 U.S.C. § 303.
6 Under chapter 7, prebankruptcy assets are liquidated to pay off prebankruptcy debts. A chapter
7 liquidation does not generally commit the debtor’s postbankruptcy assets and/or income, nor
will it discharge postbankruptcy debts.
7 11 U.S.C. § 101(18).
8 11 U.S.C. § 1221.

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within 45 days.9 Only the debtor may propose the reorganization plan, which must be
completed within a specified three to five-year time frame. The debtor’s plan must meet
the statutory requirements for chapter 12, but, unlike chapter 11, creditor committees are
not appointed, and the plan is not voted on by creditors. The debtor receives a discharge
of indebtedness upon completion of all payments under the plan.

Appointment of a standing trustee. A trustee is rarely appointed under chapter
11. Although chapter 12 requires the participation of a standing trustee, the trustee’s
duties are administrative and the farmer retains possession and control of the farm
throughout the reorganization.
Benefits of chapter 12. As noted above, chapter 12 borrows many debtor-
friendly features from chapter 13, and adapts some provisions specifically to the needs of
farm debtors. Among these provisions are:
! Liberalized “cramdown.” Cramdown is a term used in bankruptcy law
to refer to the procedure which enables a debtor to modify a creditor’s
claim over the creditor’s objection. Chapter 12 debtors are not bound to
“the absolute priority rule” which applies in chapter 11. Hence, secured
creditors of a chapter 12 farmer, despite objections they may harbor, have
less ability to influence or reject the reorganization plan than chapter 11
creditors. As in chapter 13, dissenting creditors may object to the
debtor’s reorganization plan. The objection triggers the Code’s
requirement that all of the debtor’s projected disposable income be
applied to plan payments. Creditors must receive at least as much payout
on their claims in chapter 12 as they would if the debtor were
liquidated.10
! Bifurcation of liens or “lien stripping.”11 A family farmer is permitted
to reduce – or “strip” – the value of a lien on secured property.12 Hence,
in situations where there is deflation in the value of the farm property, the
debtor may reduce the amount owed to the secured lender and discharge
the unsecured portion. Lien stripping is not generally permitted in
chapter 7.13 It is permitted in chapter 13, but the debtor may not modify
a home mortgage. Although lien stripping is permitted under chapter 11,
creditors whose security interests are bifurcated into secured and
unsecured claims have greater power to shape and/or veto the debtor’s
9 11 U.S.C. § 1224.
10 11 U.S.C. § 1225.
11 When a secured creditor holds a claim in which the value of the collateral is less than the
contractual amount owed the creditor, the Bankruptcy Code splits or “bifurcates” it. It is treated
as a secured claim up the value of the collateral, and an unsecured claim for the amount which
constitutes the discrepancy between the collateral’s value and the contractual amount of the
claim. 11 U.S.C. § 506. In other words, the claim of a secured creditor is legally protected up to
the value of the collateral which secures the claim.
12 Harmon v. United States Through Farmers Home Admin., 101 F.3d 574 (8th Cir. 1996).
13 Dewsnup v. Timm, 502 U.S. 410 (1992).

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reorganization plan. Chapter 12 also permits repayment of reformed
secured claims over a period of time exceeding the plan period. Because
chapter 12 provides the family farmer in bankruptcy with expanded
authority to renegotiate with lenders, its influence may extend to informal
renegotiations outside of bankruptcy as well.
! Adequate protection and tax requirements. Any bankruptcy debtor who
retains collateral must provide the creditor “adequate protection” for the
value of the collateral subject to the debtor’s use.14 Chapter 12 has its
own standards for awarding “adequate protection”15 and a provision
governing “special tax provisions.”16
Although chapter 12 was enacted as a temporary measure, it has been continuously
extended. There have been – and are currently – legislative proposals to make it a
permanent part of the U.S. Bankruptcy Code. The chapter, however, is not without its
critics. Questions asked include whether the benefits of chapter 12 outweigh its costs;
whether it encourages economic inefficiency in the farm sector; and whether the ability
of farmers to write off secured debt has a positive impact on agricultural lending.17
Legislative Activity and Outlook. The House and Senate-passed comprehensive
bankruptcy reform bills in the 106th Congress included provisions to enact chapter 12
permanently.18 But the 106th Congress concluded with neither a temporary nor a
permanent enactment of Family Farmer Reorganization.
Early in the 107th Congress, major bankruptcy reform legislation passed both
chambers, H.R. 333 in the House and S. 420 (passed as H.R. 333) in the Senate.
Although a conference was appointed and a report issued,19 the report was not passed
prior to adjournment sine die of the 107th Congress. The Conference Report would have
enacted chapter 12 permanently. It provided for adjustment of the jurisdictional debt
limit in accordance with the cost of living index,20 and had several additional provisions.
Among those were amendments to the jurisdictional filing requirements that raised the
debt limit from $1,500,000 to $3,237,000 and lowered the percentage requirement for
income that must be derived from farming. It expanded the time frame for measuring
14 11 U.S.C. § 361.
15 11 U.S.C. § 1205.
16 11 U.S.C. § 1231.
17 Jerome Stam, “Do Farmers Need a Separate Chapter in the Bankruptcy Code,” Information
Bulletin No. 724-09, Economic Research Service, USDA (October 1997).
18 H.Rept. 106-970 to accompany H.R. 2415, 106th Cong., 2d Sess., §1001(2000). See also, H.R.
833 (S. 625), 106th Cong., 2d Sess. § 1001 (2000)(Senate-passed version); H.R. 833, 106th Cong.,
1st Sess. § 201 (1999)(House-passed version).
19 H. Rep. 107-617, 107th Cong., 2d Sess. (2002).
20 Id. at. §§ 1001, 1002.

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farm income from one to three years.21 In addition, the report added a new category of
“family fishermen” to chapter 12.22
These provisions were reintroduced in the 108th Congress in H.R. 975, the
“Bankruptcy Abuse Prevention and Consumer Protection Act of 2003,” which passed the
House on March 19, 2003.23 On November 25, 2003, the Senate passed S. 1920, 108th
Cong., 1st Sess. (2003) by unanimous consent. The bill would have extended chapter 12
for another six months, through July 1, 2004. The House passed S. 1920 on January 28,
2004, after substituting the text of the bill with the language of H.R. 975. The House has
requested a conference with the Senate and has appointed conferees. The Senate has not
yet acted.
21 Id. at 1004, 1005.
22 Id. at § 1007.
23 H.R. 975, 108th Cong., 1st Sess., Title X (2003). See H.Rept. 108-40, Part 1, 108th Cong., 1st
Sess. (2003).

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