What Is Chapter 12 Bankruptcy?
Chapter 12 is a category of bankruptcy that applies specifically to farms
and fisheries. Chapter 12 allows proprietors of farms and fisheries to
reorganize their finances and debts while still maintaining ownership
of their assets. Generally, debtors will work with a bankruptcy trustee
and creditors to craft payment programs based on their current financial
obligations. The repayment programs can last between 3-5 years.
Two types of farming operations qualify for Chapter 12 bankruptcy –
individual operations and corporation or partnerships.
An individual or married couple with a farming or commercial fishing operation
and regular annual income may file for Chapter 12 and must have:
- total debts that do not exceed $4,153,150 for a farmer and $1,924,550 for
a fisherman;
- at least 50% of their debts be from the farming operation (for a family farmer);
- at least 80% of their debts be from the fishing operation (for a family
fisherman);
- more than 50% of their gross income be from the farming or fishing operation
for the prior tax year.
A corporation or partnership may also qualify as a family farmer or fisherman
eligible for Chapter 12 if they meet the following requirements:
- more than half of the stock must be owned by one family and its relatives,
and they must actively conduct business operations;
- more than 80% of the company's value must be tied to its farming or fishing
operations;
- total debt limits and percentages are the same as for individual farmers
and fishermen;
- the corporation does not issue publicly traded stock.
Note that regardless of whether the filer is an individual, corporation,
or partnership, they must not have willfully failed to appear in court,
comply with court orders, or have been voluntarily dismissed after creditors
sought payment via bankruptcy court within the last 180 days. Filing individuals
must also have received credit counseling from an approved agency within
180 days before filing.
The Filing Process
Chapter 12 bankruptcy follows the same process as other bankruptcies. The
process begins when a farmer or fisherman files a petition, and meetings
will then be held with creditors under court supervision, where business
assets will be measured and may be used to repay the outstanding debt.
During the meeting, a trustee appointed by the court may ask certain questions
about the petition and financial affairs, which will be used to set up
the final payment plan.
Chapter 12 also has an automatic stay provision for consumer debt that
prevents creditors from collecting debt. More specifically, an automatic
stay prohibits creditors from taking certain collection actions without
the permission of the bankruptcy court. It is meant to protect the debtor
and anyone liable on any of the debtor’s consumer debts (debts incurred
for personal, family, or household purposes rather than the business debts
associated with the farming or fishing operation).
A person that wishes to file for Chapter 12 must gather all their financial
information and submit the voluntary petition, the schedules, the statement
of financial affairs, a complete list of debts and creditors, and any
other documents the court requests. These documents and any required fees
must be filed with the clerk of the bankruptcy court in the area the person
lives or conducts their business.
After the necessary meetings with the appointed trustee and creditors,
the debtor must propose a Chapter 12 plan that pays off their debts over
a period of 3-5 years. Note that the plan can include secured and unsecured
debts, and secured creditors must be paid the value of their collateral
and unsecured creditors must receive as much as they would have under
a Chapter 7 liquidation. A bankruptcy judge must confirm the plan in a
confirmation hearing. After the plan is finalized, the Chapter 12 debtor
must make regular payments to the trustee, who will then make payments
to creditors.
