Chapter 12 bankruptcy allows "family farmers" or "family fishermen" with "regular annual income" to file for a specific kind of bankruptcy protection. Chapter 12 bankruptcy allows farmers faced with financial difficulties to propose a plan to repay their debts. Chapter 12 plans may propose to pay all debt, but often propose to pay a portion of the debt over a period of time. Under Chapter 12, farmers pay obligations through installments over a typical time period of three to five years with payments that include all of the disposable income.
One advantage of Chapter 12 for farmers is that it eliminates some of the barriers they might face if hoping to reorganize under either Chapter 11 or 13 of the Bankruptcy Code. For example, Chapter 12 is more efficient, less complicated, and most importantly less expensive than chapter 11, which is better suited to large corporate reorganizations. Chapter 13 is better suited for wage earners who typically have less debt than many family farmers might. Chapter 12 was designed to combine some of the more advantageous features of bankruptcy in a framework that is beneficial for farmers. Another advantageous feature of Chapter 12 is that payments to secured creditors can sometimes extend beyond the three-to-five-year period of the plan. For example, if the debtor's underlying debt obligation was scheduled to be paid over more than five years (i.e., an equipment loan or a mortgage), the debtor may be able to pay the loan off over the original loan repayment schedule as long as any arrearage is made up during the plan.
Only family farmers or family fisherman with "regular annual income" may file for bankruptcy under Chapter 12. The regular annual income requirement balances the need for sufficient and feasible income with which to fund a Chapter 12 plan with the reality of the situation that results in seasonal income for many farmers. This type of structure is not typical in other types of bankruptcy.
Chapter 12 puts "family farmers" and "family fishermen" into two categories: (1) an individual or individual and spouse and (2) a corporation or partnership. Farmers in the individual category must meet the following requirements in order to file a Chapter 12 bankruptcy:
- Be engaged in a farming or commercial fishing operation
- The total debts (secured and unsecured) of the operation must not exceed $4,031,575 (if a farming operation) or $1,868,200 (if a commercial fisherman).
- If a family farmer, at least 50%, and if family fisherman at least 80%, of the total debts that are fixed in amount (exclusive of debt for the debtor's home) must be related to the farming or commercial fishing operation.
- More than 50% of the gross income of the individual or the husband and wife for the preceding tax year (or, for family farmers only, for each of the 2nd and 3rd prior tax years) must have come from the farming or commercial fishing operation.
Farmers in the corporation or partnership category must meet the following requirements in order to file a Chapter 12 bankruptcy:
- More than one-half the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives.
- The family or the family and its relatives must conduct the farming or commercial fishing operation.
- More than 80% of the value of the corporate or partnership assets must be related to the farming or fishing operation.
- The total indebtedness of the corporation or partnership must not exceed $4,031,575 (if a farming operation) or $1,868,200 (if a commercial fishing operation).
- At least 50% for a farming operation or 80% for a fishing operation of the corporation's or partnership's total debts which are fixed in amount (exclusive of debt for one home occupied by a shareholder) must be related to the farming or fishing operation.
- If the corporation issues stock, the stock cannot be publicly traded.
If you have any questions about the Chapter 12 bankruptcy process, or if you would like to discuss options under the bankruptcy code, please contact one of the experienced board certified bankruptcy attorneys at Keller & Almassian, PLC.