Cite as: Keith M. Lundin, Lundin On Chapter 13, § 12.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
Farm income can be regular income for eligibility purposes even though it is received only when crops or livestock are marketed.1 If the debtor is a farmer, the plan must propose payments that reflect the timing of farm income.
The reported decisions speak of income from farming that is received at least once a year. Section 109(e) defines eligibility for Chapter 13 in terms of regular income, not frequent income.2 Most farming operations cooperate and produce cash at least once a year. A farmer with crops that do not produce each year—a nurseryman whose trees can be marketed every two or three years; the asparagus grower who may have to wait three or four years to harvest—are difficult fits in a Chapter 13 case. Creditors and trustees want to see income that is at least annual. If the debtor has farm income that is not annual, it may be necessary to find other sources of income that are at least annual and to then enhance the payments into the plan in years when there is farm income.
There are many government programs that pay farmers cash or in kind in lieu of actually growing crops, raising livestock or producing milk. Crop and land set-aside programs and payments in kind are substitutes for farm income and should be characterized by the courts as regular income.
For example, it has been held that yearly payments received by the debtor from a federal land retirement program are regular income for Chapter 13 purposes.3 However, the same court concluded that payments from the Commodity Credit Corporation pursuant to a dairy herd termination program did not constitute regular income because the payments were subject to a perfected security interest in favor of the original livestock lender. It is not obvious why government payments are any less regular income because burdened by a security interest. That the debtor’s income may be subject to a security interest raises adequate protection questions4 and may require special provisions in a Chapter 13 plan to protect the secured creditor; however, there is nothing in the Bankruptcy Code to suggest that income is not regular simply because a creditor claims rights in that income. Any business debtor who sells inventory that is subject to a security interest has the same problem—income from the sale of inventory can be regular income in spite of a perfected security interest in the proceeds.5
Because most payment-in-kind and crop set-aside programs must be renewed yearly, the stability of such income is problematic in a three- to five-year Chapter 13 plan. The debtor may have difficulty showing that at the expiration of the current program there is a likelihood of renewal or that the debtor will plant crops or raise livestock to produce regular income sufficient to continue funding the plan. Also, any payments from the government to which the debtor is entitled under a crop or land set-aside program may be subject to setoff in favor of any other government agency to which the debtor owes a prepetition debt.6 The government’s right of setoff may give the government a secured claim under § 506(a) and may entitle the government to adequate protection of its interest in the payments due the debtor—those payments may be regular income for eligibility purposes, but the debtor may not be financially able to use those payments and provide adequate protection for the government’s right of setoff.7
Payment in kind has the additional problem that the value of a future payment in commodity form may be unknowable at the time of the debtor’s petition. This is a variation on the question whether a crop in the field will produce enough income at harvest to fund a plan. Debtor’s counsel will make the same kinds of arguments—based on current market conditions and the best guesses of what future commodity prices will be.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)8 dramatically changed the impact of the timing of the receipt of income on the rights of unsecured creditors at confirmation. Detailed elsewhere,9 upon objection by the trustee or an allowed unsecured claim holder, the debtor typically must commit to pay all “projected disposable income”10 into the plan for an “applicable commitment period”11 of three or five years.12 The calculations of projected disposable income and applicable commitment period are based on “current monthly income” (CMI), which is usually the average of monthly income over the six months before the month in which the petition is filed.13
Debtors with crop or livestock income typically will not receive that income monthly but rather in lumps when crops or animals are sold. Depending on the timing of the Chapter 13 petition, those lumps may or may not be within the six-month period for calculating CMI.14 Thus, the entitlement of unsecured creditors at confirmation may be temporally out of sync with the determination whether a debtor has regular income from farming. The debtor may be eligible for Chapter 13 because of crop income that would not be included in CMI for confirmation purposes or vice versa—the CMI calculation may capture for unsecured creditors at confirmation income that the debtor does not rely upon to be eligible for Chapter 13. Either situation can spell trouble at confirmation for debtors with crop or livestock income.15
Note also that having farm income and being a “farmer” are not necessarily the same things for bankruptcy purposes. Discussed elsewhere,16 the statutory terms “farmer” and “family farmer” require that an individual have fixed percentages of income and/or debt from a farming operation.17 Some individuals have income and/or debts from crops or livestock but do not meet the technical statutory definitions for eligibility for Chapter 12. Individuals with some income from crops or livestock find their way to Chapter 13 when Chapter 12 is not available.18 Farming income becomes a component of the debtor’s income picture for eligibility purposes and at confirmation.
1 In re Fiegi, 61 B.R. 994 (Bankr. D. Or. July 1, 1986) (Radcliffe); In re Hines, 7 B.R. 415 (Bankr. D.S.D. Nov. 26, 1980) (Ecker).
2 See 11 U.S.C. § 109(e), discussed in § 11.1 What Is Regular Income?.
3 In re Collins, 68 B.R. 242 (Bankr. D. Minn. Dec. 9, 1986) (Mahoney).
6 See § 58.12 Setoffs and Recoupments for discussion of setoff. See, e.g., In re Buckner, 165 B.R. 942 (D. Kan. Mar. 16, 1994) (Crow). (United States is entitled to set off a debtor’s entitlement under the Conservation Reserve Program against prepetition defaults on a loan from the Farmers Home Administration.).
8 Pub. L. No. 109-8, 119 Stat. 23 (2005).
13 See 11 U.S.C. § 101(10A), discussed in § 92.3 Current Monthly Income: The Baseline.
14 The Supreme Court of the United States in Hamilton v. Lanning, 560 U.S. 505, 130 S. Ct. 2464, 177 L. Ed. 2d 23 (June 7, 2010), may have altered the statutory calculation of CMI when income from a crop or livestock sale is outside the six-month period in § 101(10A), but is “known or virtually certain.” See § 92.3 Current Monthly Income: The Baseline.
17 See 11 U.S.C. §§ 101(18) and 101(20), discussed in § 8.4 Chapter 12 Not Available or Not Helpful.