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Consumer Bankruptcy Law and Practice: 17.4.7.1 Generally

The chapter 12 debtor-in-possession has the power to assume or reject executory contracts and unexpired leases under section 365 of the Code. Refer to the discussion of this topic in the context of chapter 13 in § 12.9, supra, for a general understanding of section 365.414

Consumer Bankruptcy Law and Practice: 17.4.7.2 Federal Farm Program Contracts As Executory Contracts

Farmers will frequently participate in one or more federal farm programs. As these contracts, in particular those that extend beyond one year, have been held to be executory contracts, it may be necessary for the farmer to reaffirm the program contract in order to continue participation in the program. On the other hand, if the farmer has defaulted on the obligation under the program and risks penalties, rejection of the contract may be in order.

Consumer Bankruptcy Law and Practice: 17.4.8 Use of Cash Collateral

The typical consumer debtor is not concerned with the use of cash collateral except for the consumer’s use of checking or savings accounts at creditor institutions.425 However, the source of a farmer’s income for living and operating expenses is often derived directly from sources in which secured creditors have a continuing, postpetition security interest. Moreover, in chapter 12 an ongoing business is at issue, and this business is likely to need funds for its continuation, which may involve the use of “cash collateral.”

Consumer Bankruptcy Law and Practice: 17.4.10 Sale of Property Free and Clear of Liens

Chapter 12 includes a provision444 allowing the chapter 12 trustee and the debtor-in-possession445 to sell farmland or farm equipment free and clear of liens regardless of creditor consent.446 Any lien affected by the sale attaches to the proceeds.447 As with all sales of secure property under section 363, the trustee or debtor-in-possession must make application for sale free and clear of liens, and

Consumer Bankruptcy Law and Practice: 17.4.11 Adequate Protection Under Chapter 12

Instead of utilizing the adequate protection definition applicable to other bankruptcy chapters,449 section 1205 creates a special chapter 12 definition of adequate protection for secured creditors.450 Section 1205 applies to chapter 12 cases whenever reference is made to adequate protection under sections 362 (automatic stay and relief therefrom), 363 (sale, use and lease of property and use of cash collateral), and 364 (obtaining credit).

Consumer Bankruptcy Law and Practice: 17.4.12 Creditors’ Right to Set Off

Under section 553, a creditor may claim or set off against its indebtedness any benefits or property in the creditor’s possession or control if: (1) the debt owed to the creditor by the debtor arose before commencement of the bankruptcy case; (2) the claim of the creditor against the debtor also arose before commencement of the bankruptcy case; and (3) the debt and claim are mutual obligations.460 The provisions of section 553 do not expand the rights of creditors; the creditor claiming a right to set off must be entitled so to do under exist

Consumer Bankruptcy Law and Practice: 17.5.1 Overview

Sections 1222 and 1225 provide the requirements for the chapter 12 debtor’s reorganization plan. If the debtor can convince the court that the proposed plan meets these requirements, the court “shall” confirm the plan, even in the face of creditor objection.

Consumer Bankruptcy Law and Practice: 17.5.3 Determining the Value of the Creditor’s Claims: The Allowed Secured Claim

Section 1225 contains specific and distinct requirements for the treatment of secured claims and unsecured claims under the debtor’s plan. In most chapter 12 cases the debtor will have at least one major secured creditor that is undersecured, that is, the debt to that creditor is more than the amount of valid security. In this situation, chapter 12 provides for the bifurcation of the debt to the creditor into the allowed secured claim (generally equal to the value of the security) and an unsecured claim equal to the remaining obligation.

Consumer Bankruptcy Law and Practice: 17.5.4.1 Generally

Section 1225(a)(5) sets out three alternatives for the treatment of secured claims under chapter 12. First, the secured creditor can agree to its treatment under the plan. Second, the plan can provide that the secured creditor receive the “present value” of its secured claim and keep its lien on its collateral. This second alternative is the one that is used most often by chapter 12 debtors. In general terms, it means that the creditor will be paid an amount equal to the fair market value of the collateral.

Consumer Bankruptcy Law and Practice: 17.5.4.3 Interest Rates for Secured Creditors

Secured creditors in chapter 12 cases are entitled to an interest or discount rate to assure them the present value of their claim when it is paid over time.525 In the past, although courts have agreed that a “market rate” was generally appropriate, different courts have taken diverse approaches to determining what the market rate might be.

Consumer Bankruptcy Law and Practice: 17.5.4.4 Return or Surrender of Property to Secured Creditors

One of the most effective tools of reorganization is the paring down of the farm operation by reduction of collateral and its accompanying debt service. One of the primary methods of accomplishing this is return, relinquishment or abandonment to the secured creditor of all or a portion of the creditor’s collateral. Such a return or relinquishment operates to reduce the allowed secured claim by the value of the collateral.

Consumer Bankruptcy Law and Practice: 17.5.4.5 Sale of Property Free and Clear of Liens

Chapter 12 allows the sale of collateral in a debtor’s estate free and clear of liens regardless of whether the consent of the secured creditor is granted and of whether the sale will bring sufficient funds to satisfy the entirety of the secured creditor’s claim.546 By contrast, sale free and clear of liens can only take place in other bankruptcy chapters under certain more restrictive conditions.547 Although section 1206 is couched in terms of sale by the trustee, the debtor can sell conditione

Consumer Bankruptcy Law and Practice: 17.5.5.1 Generally

Section 1225 also sets forth specific confirmation requirements that apply to the debtor’s unsecured claims. There are two such requirements, the “liquidation test” and the “disposable income requirement.” The debtor’s plan must meet each of these different tests with regard to each of their unsecured creditors. Note that a secured creditor may have both a secured and an unsecured claim, so all of the relevant tests must be applied to that creditor.

Consumer Bankruptcy Law and Practice: 17.5.5.2 The Liquidation Test

Chapter 12 requires that unsecured creditors under a plan receive not less than they would have received if the debtor had undergone liquidation.552 This test is discussed elsewhere in this treatise.553 In many farmer bankruptcies, virtually all equity has been pledged to one or more creditors as security; unpledged property is usually exempt. In such cases, unsecured creditors would receive little or nothing upon liquidation.

Student Loan Law: 11.11.2 Challenges Based on Standing

Student loan debts, like mortgages, are often securitized and sold to investors. While there may be no question that a debtor at some point entered into a transaction that created a nondischargeable student loan debt, it may be less clear that the party currently seeking to enforce the debt as an assignee of the original lender has the right to enforce that debt.

Consumer Banking and Payments Law: 2.7.9.4 Overdraft Limits

In March 2022, the FDIC issued a report283 stating that several financial institutions had converted their overdraft protection programs284 from those with a fixed overdraft limit amount (static limit), to one where the overdraft limit could change as frequently as daily (dynamic limit).

Consumer Banking and Payments Law: 2.9.2.2 Contract Law

The account agreement should also be examined. The agreement may specify precise conditions that must be met for the customer to close the account. Some account agreements may give banks the right to refuse to close an account if the account is negative, a transaction is in process, funds pledged for collateral need to be released, or for other reasons. However, such conditions should be viewed as violating the consumer’s right under the UCC to close the account.352