Agriculture & Debt: What Farmers Need to Know About Chapter 12 Bankruptcy

Chapter 12 bankruptcy is rarely used because few debtors qualify for its provisions. In fact, when Chapter 7 and Chapter 13 filings are in the hundreds of thousands, Chapter 12 filings are usually in the hundreds.

Chapter 12 bankruptcy is specifically designed to help family farmers and fishermen, as opposed to larger businesses or individuals. Chapter 12 bankruptcy allows these people to develop a repayment plan to deal with all or part of their debts. The plan is generally over a period of three to five years. Chapter 12 bankruptcy is always voluntary, and only a debtor can file a Chapter 12 petition.

Chapter 12: A Cross Between Chapter 13 and Chapter 11

Chapter 12 bankruptcy is often thought of as between Chapter 11 bankruptcy and Chapter 13 bankruptcy. Individuals in Chapter 13 bankruptcy often do not have the large debts that family farmers or fishermen often use as part of their business. Instead, Chapter 13 plans are designed to deal with smaller, often unsecured debts.

On the other hand, family farmers generally do not need some of the most complicated aspects of Chapter 11 plans. The administrative burdens of Chapter 11 plans can be overwhelming for some family farmers and fishermen. Chapter 12 is supposed to be more streamlined and less complicated—perfect for family farmers and fishermen.

Who Can File a Chapter 12 Bankruptcy?

Only family farmers and family fishermen who have “regular annual income” can file for Chapter 12 bankruptcy. This requirement ensures that the debtor’s plan will be sufficiently stable to make monthly payments to creditors over the life of the plan. However, some family farmers may also qualify if they have seasonal income.

The code defines “family farmers” and “family fishermen” as either 1) an individual or an individual and spouse, or 2) a corporation or partnership. The total indebtedness must also be below roughly $4 million for a farming operation or below approximately $1.8 million for a commercial fishing operation. The majority of the debts should also be related specifically to the farming or fishing operation. Other restrictions also apply that vary depending on the structure of the business.

The Chapter 12 Process

Chapter 12’s process is similar to Chapter 13 in that the debtor must develop a repayment plan to pay all or a portion of their outstanding debts. The bankruptcy court will then approve the plan, and a trustee will administer it to ensure that funds are distributed to creditors appropriately. Many of the specific rules that apply to Chapter 13 plans also apply to Chapter 12 plans, including the requirement to pay priority claims such as taxes or domestic support obligations. A debtor’s disposable income must be fully committed for the life of the plan, up to five years.

Once the debtor has completed all the payments and their plan, they will receive a discharge from their debts.

Getting Legal Help

Although Chapter 12 plans are rare, they are oftentimes best option for struggling family farmers and fishermen. Nonetheless, even these individuals may qualify for a different type of bankruptcy. It is best to speak with a bankruptcy attorney who is experienced in Chapter 12 bankruptcy to determine the right type of bankruptcy for your situation. Call MaxwellDunn for more information at (248) 809-1395.