Chapter 12 bankruptcy is a relatively new addition to bankruptcy laws. It allows “family farmers” and “family fisherman” to restructure their finances and avoid liquidation or foreclosure. It’s very similar to Chapter 13 bankruptcy, but provides additional benefits to debtors.
For much of our nation’s history, there were few bankruptcy laws specifically designed to protect family farmers and fishermen. Congress enacted Chapter 12 bankruptcy in 1986 as an emergency response to the tightening of agricultural credit and the pressure that it placed on family farmers and fishermen. Chapter 12’s provisions were temporary for many years and did not become permanent until 2005.
Eligibility for Chapter 12 Bankruptcy
Despite its important purpose, Chapter 12 bankruptcy has very limited application. Few debtors are eligible to file bankruptcy under Chapter 12. Of the 1.4 million bankruptcies filed in the United States in 2011, only 637 were Chapter 12 cases. Under the bankruptcy laws, only a family farmer or fisherman with “regular annual income” may seek protection under Chapter 12. “Regular annual income” may be seasonal as long as it is stable and regular enough to allow the debtor to make payments under a Chapter 12 plan.
Debtors under Chapter 12 may be individuals (married or single), corporations, or partnerships. Individual Chapter 12 debtors must:
• be engaged in a farming or commercial fishing operation
• have total debts of not more than $4,153,150 if they are farmers or $1,924,550 if they are fishermen (as of April 2016)
• owe 50% of their total debts on account of farming operations or 80% of their total debts on account of commercial fishing operations (in both cases excluding home mortgages), and
• derive over 50% of their gross income from farming or commercial fishing operations.
Similar restrictions apply to farms and fishing operations owned through family partnerships and corporations. Partnerships and corporations cannot file bankruptcy under Chapter 12 unless a single family owns more than 50% of their stock or equity interests.
How Chapter 12 Works
A Chapter 12 case begins when the debtor files a voluntary petition for relief. Most Chapter 12 debtors continue farming or fishing operations after they file bankruptcy. A bankruptcy trustee is appointed, but generally, his or her duties are limited to reviewing documents, monitoring the debtor’s operations, advising the court, and collecting and disbursing plan payments. Chapter 12 debtors must propose a repayment plan within 90 days of the date that they file bankruptcy. The bankruptcy court can extend the plan deadline in certain circumstances.
The Chapter 12 Repayment Plan
The plan process in Chapter 12 is similar to that in Chapter 13. Under Chapter 12, debtors propose a plan to pay creditors over three to five years. Three years is the minimum plan period in Chapter 12 unless the debtor can pay all amounts owed sooner. The plan period can be extended to five years with court approval. The plan period must be five years if the debtor owes domestic support obligations (child support or alimony) that he or she does not pay in full sooner.
Confirmation of the Chapter 12 Plan
Chapter 12 plans are subject to bankruptcy court approval, or “confirmation.” The hearing on confirmation is supposed to be held within 45 days of the date that the plan is filed. Before the confirmation hearing, the Chapter 12 trustee reviews the proposed plan and other documents filed by the debtor and makes recommendations to the bankruptcy court. The bankruptcy court is responsible for deciding whether to confirm a proposed Chapter 12 plan, but most judges rely heavily on the trustee’s recommendations.
Elements of a Chapter 12 Plan
Required plan payments. During the plan period, the debtor must turn over all of his or her “disposable income” to the Chapter 12 trustee. “Disposable income” in a Chapter 12 case is the difference between the revenue generated by the debtor’s farm or fishing operations and the amount reasonably needed to cover:
• business expenses, and
• expenses incurred in the maintenance and support of the debtor’s family.
The trustee retains a fee from the plan payments and disburses the balance to creditors.
Mortgages and other secured claims. One of the advantages of Chapter 12 is that it allows debtors to “cram down” secured debt, like farm mortgages and boat loans. Mortgage lenders and other secured creditors must be paid at least the value of the collateral pledged for the debt. Any balance owed in excess of the collateral’s value can be treated as unsecured debt, which is often paid little or nothing in Chapter 12 cases. Payments on secured debt can be stretched out even beyond the term of the plan, and interest can be reduced to a current market rate.
Discharge of debt. Chapter 12 plans have to meet the “best interests of creditors” test. Under the “best interests” test, creditors have to be paid at least as much under a Chapter 12 plan as they would receive in a Chapter 7 bankruptcy liquidation. As long as the “best interests” test is met, unsecured creditors can be paid pennies on the dollar or even nothing at all.
After the confirmation hearing, the case remains open until the debtor makes all required payments to the Chapter 12 trustee. Once all required payments have been made, the court grants the debtor a discharge, and the case is closed. A discharge, with some exceptions, eliminates a debtor’s liability for obligations not covered by its Chapter 12 plan. Most obligations are dischargeable. There are, however, some obligations, such as child support and alimony that are nondischargeable even under Chapter 12.
A Chapter 12 case can be dismissed if the debtor cannot obtain plan confirmation or make required payments. A debtor also can elect to dismiss a Chapter 12 case or convert it to a Chapter 7 liquidation.
How Chapter 12 Bankruptcy Works
Gather all of your financial information if you want to file for Chapter 12. The procedure works similarly to those of other bankruptcy chapters. You must submit a voluntary petition, the schedules, the statement of financial affairs, a complete list of your 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 where you live or conduct your business.
Types of Chapter 12 Provisions and Relief
Filing for Chapter 12 bankruptcy protection provides relief from creditors, but it also comes with numerous rules.
The Automatic Stay
An automatic stay goes into effect when a farmer or fisherman files for Chapter 12 bankruptcy, just as with all other bankruptcy cases. The stay prohibits creditors from taking collection actions without the permission of the bankruptcy court. In addition to protecting the debtor, the automatic stay in a Chapter 12 case also protects anyone who is also liable on any of the Chapter 12 debtor’s consumer debts. These are debts incurred for personal, family, or household purposes rather than business debts associated with the farming or fishing operation.
Trustee and Creditors
The court will appoint a trustee to work with the debtor and their creditors. The Chapter 12 trustee will hold a meeting of creditors at the beginning of the proceedings. The trustee and creditors may ask you questions about your petition and financial affairs during the meeting. This information will be used to set up your payment plan.
Eligibility for Individuals and Married Couples
Only one person or married couple can file for Chapter 12 (you and a business partner cannot file together). Other eligibility requirements include:
• You or your relatives must actively engage in farming or commercial fishing
• Total debts must be $4,153,150 or less for farmers
• Total debts must be $1,924,550 or less for commercial fishermen
• 50% or more of your total income must have come from farming or fishing in the previous year
Eligibility for Businesses
A corporation or partnership may be eligible to file for Chapter 12 bankruptcy if it is closely held by a family and does not have publicly traded stock. Other requirements include:
• One family (or a group of relatives) needs to own more than half the stock or equity
• One family (or a group of relatives) must be the workers or on the staff at the farming or fishing operation. They can’t own from afar and have it managed or worked by others.
• 80% of more of the company’s value must be in assets related to farming or fishing. Examples are boats, equipment, buildings, etc.
• Total debt is capped at $4,153,150 for a farm and $1,924,550 for a commercial fishery or fishing business (as of 2020). This debt amount does not include debt from owning a home.
• At least 50% of the total business debt must be for the farming business ($2,076,575 as of 2020)
• At least 80% of the business debt must be for the fishing business ($1,539,640 as of 2020)
• Stocks can’t be publicly traded
“Regular Annual Income”
To qualify for Chapter 12, you must receive regular annual income from your family-owned or family-run fishing or farming operation (this can be seasonal). The income requirement is necessary to ensure your yearly income is stable. This helps during the reorganization and repayment phase because you can accurately predict what you can make in a year. This allows you to make each payment.
Other Eligibility Considerations
You can’t file for any bankruptcy chapter if:
• You failed to appear in court for bankruptcy in the last 180 days. This results in your bankruptcy being dismissed. This does not apply to legal reasons or accidents that led to you missing the court date.
• You failed to follow all court orders in the last 180 days. This will also dismiss your bankruptcy case.
• Your creditors asked the bankruptcy court for your property because they hold liens on it. Bankruptcy cases can be voluntarily dismissed at this point if the debt no longer exists.
• You failed to get court-ordered credit counseling in the past 180 days.
You will need to submit all forms and information about:
Your business’s creditors or lenders
The amount of each creditor’s claim and what was purchased with the money
Your total annual income and the frequency of your income (for seasonal operations)
Your assets and property
Your expenses per month (i.e., utilities for buildings, taxes, transportation of workers or products, medicine and food for fish or animals, fertilizer, etc.)
Even if you file together, each spouse needs to provide this information. If just one spouse files for bankruptcy, the other spouse needs to show their income and expenses so the courts can understand your household’s entire financial picture.
Appointment of Bankruptcy Trustee
Your case will have an impartial trustee assigned, called a bankruptcy trustee. This person will oversee the case, administer tasks and debt repayments, and be there to answer your questions. They will evaluate your case and decide whether it is approved or not. While this person may be helpful, they represent the bankruptcy case’s interests and not yours. Hiring a bankruptcy attorney is the only way to make sure your interests are upheld.
When you file the Chapter 12 petition you will get an automatic stay. This will stop most collection agencies and debt collectors from taking action against you. These creditors and agencies generally can’t:
Sue you (and current lawsuits must stop)
Take your salary through wage garnishments
Make calls to your or your family asking for information or payments
The bankruptcy court will automatically give notice of the case to all your creditors. During the process, you will provide their names and addresses. Make sure to include them all so they will stop calling you!
Protecting Co-Debtors with an Automatic Stay
The automatic stay will also protect your co-debtors. Creditors can no longer call them and hold them responsible for the debt they signed on to unless the court authorizes them to. This protects:
Co-debtors who signed paperwork with you
Any person liable for the debt
Meeting of Creditors in Chapter 12 Bankruptcy
Your bankruptcy trustee will hold a “meeting of creditors” between 21 to 35 days after you file the petition and it is approved. Some areas do not have trustees or administrators on staff. In situations like this, the meeting can take up to 60 days to take place.
During the meeting, you can expect to:
• Take an oath to tell the truth
• Answer questions from your trustee or creditors (often creditors do not show up to these meetings)
• Attend the meeting (both spouses must attend if you filed together)
• Answer questions honestly about your finances
• Have a debt repayment plan and discuss the timeline and terms
Talk to an Attorney to Learn About Chapter 12
Depending on your unique situation and your financial goals, bankruptcy just might be the best option for you. But making the right decision as soon as possible can make all the difference. It’s a good idea to talk to Ascent Law Firm attorney if you have questions about bankruptcy or would like some guidance through the bankruptcy process.
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