Chapter 12 Bankruptcy: What You Need to Know
Chapter 12 bankruptcy is aimed specifically at family farmers and fishermen, and it allows for a reorganization of debt that makes it easier for people in those fields to maintain their businesses. Recent legislation has been passed through Congress to provide added flexibility as farmers face increasing challenges including lower pricing and long-running trade wars that have added to the financial challenges of operating a family farm.
The situation is a dire one for both industries. According to the American Farmland Trust, an acre of farmland in the United States goes into development every two minutes, which means that where once stood a cornfield meant to feed families, homes or industries will stand instead. Commercial fishing operations are facing tougher regulations due to overfishing, one of the top three issues plaguing oceans today.
Chapter 12 is rare
Of the 1.4 million bankruptcies filed in 2011, just 637 of them were Chapter 12 cases.
Chapter 12 bankruptcy, similar to Chapter 13, was established in 1986, during an era when it became more difficult for farmers and fishermen to be extended necessary credit, and small farms and fishing operations began to shut down or fold into larger conglomerates.
The provisions for Chapter 12 were originally temporary, but the industry challenges failed to lift, and Chapter 12 became a permanent bankruptcy option for farmers and fishermen in 2005. Those eligible to file for Chapter 12 must be a farmer or fisherman with a regular annual income from either industry that would allow them to make payments under the reorganization.
Those who file must:
- Be owners of a farming or commercial fishing operation.
- Have a total debt of not more than $4,153,150 for farmers or $1,924,550 for fishermen. (These numbers will change if the Senate and House bills become law).
- Owe 50 percent of their total debts for farming or 80 percent of their debt on commercial fishing (home mortgages are excluded).
- Make more than 50 percent of their gross income from farming or commercial fishing.
Chapter 12, simplified
Farming and fishing operations can continue after debtors file Chapter 12.
Like Chapter 13, debtors will agree to pay existing debts over a period of three to five years, although certain debts can be discharged or reduced to pennies on the dollar.
Under Chapter 12, a debtor will turn over all disposable income – any monies beyond covering business and family expenses – to an appointed trustee, who will distribute payments established as part of a repayment plan that must be proposed within three months of filing. Chapter 12 is subject to approval from a bankruptcy court, although judges most often rely on a trustee’s recommendations since they are more intimately familiar with individual cases.
Do you have questions about Chapter 12 bankruptcy or think it might be an option for you? Contact us today to discuss your needs!