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Chapter 12 Bankruptcy

Chapter 12 of the Federal Bankruptcy Code provides bankruptcy relief for "family farmers" or "family fishermen" with a regular annual or seasonal income. It enables financially troubled family farmers and fishermen to repay all or part of their debts in 3 to 5 years through a repayment plan.

Ideally, the plan must outline a payment scheme for at least three years unless the court approves a longer period.

Requirements for filing Chapter 12 Bankruptcy

The Bankruptcy Code divides "family farmers" or "family fishermen" into two categories

  1. An individual, or an individual and their spouse
  2. A corporation or partnership

Farmers or fishermen under the first category must fulfill the following criteria in order to qualify for relief under chapter 12:

  • The individual/ individual and their spouse must be engaged in farming or a commercial fishing business.
  • The total debts (secured and unsecured debts) incurred in the business must not exceed $3,792,650 if it is a farming business or $1,757,475 if it is a commercial fishing operation.
  • At least 50% of a family farmer's and 80% of a family fisherman's total fixed debts (exclusive of debt for the debtor's home) must be related to the farming or commercial fishing activities.
  • More than 50% of the gross income of the individual/ individual and their spouse for the preceding tax year (or 50% of the gross income for each of the 2nd and 3rd prior tax years in the case of a family farmer) must have been from the farming or commercial fishing activity.

The second category of "family farmers" or "family fishermen" must meet the following requirements in order to file bankruptcy under Chapter 12:

  • More than half the outstanding stock or equity in the corporation or partnership must be owned by one family.
  • The farming business or commercial fishing operations must be conducted by the family.
  • The total debts (both secured and unsecured debts) of the corporation or partnership must not exceed $3,792,650 if it is a farming operation or $1,757,475 if it is a commercial fishing operation.
  • More than 80% of the value of the corporation or partnership assets must be related to the farming or fishing business.
  • At least 50% (of a farming business) or 80% (of a fishing business) of the corporation's/partnership's total fixed debts (exclusive of debt for the shareholder's home) must be related to the farming or fishing operation.
  • If the corporation issues stock, the stock cannot be traded publicly.

How to file for Chapter 12 Bankruptcy

In order to initiate a Chapter 12 case, the debtor must file a voluntary petition with the court, submit a schedule of assets and liabilities, and a statement of financial affairs.

As soon as the petition is approved by the court, an "Automatic Stay" is put in place to prevent creditor collection activities.

Within 90 days of filing for bankruptcy, the debtor must submit a plan for repayment of their debts to the Bankruptcy Court. Within 45 days of filing the repayment plan a confirmation hearing is held to consider the plan.

The debtor is allowed to carry on in the normal course of business, but cannot use cash collateral, such as crops or livestock proceeds, without the approval of either the court or the creditor.

Appointment of a Trustee

Just like with every other form of bankruptcy, the court will appoint a trustee to oversee the bankruptcy procedure. A Chapter 12 trustee is in charge of:

  • Receiving and being accountable for property and payments made by the debtor.
  • Objecting to inaccurate claims.
  • Giving suggestions regarding the discharge.
  • Providing required information to interested parties.
  • Investigating the financial affairs of the debtor and operation of the farm.
  • Analyzing the feasibility of continuing the business.
  • Participating in confirmation hearings.
  • Ensuring that the debtor makes timely payments in accordance with the approved plan.

If the trustee finds fraudulent activity and mismanagement on the part of the debtor, the trustee may take over in control of the farm.

The Repayment Plan

The repayment plan proposed by the debtor aims at fair repayment of debts and reorganization of the farming or fishing business.

The plan includes modification of the terms of debt repayment of either secured or unsecured creditors and provisions for waiving a default over an extended period of time.

There are two alternatives available for debtors to repay their secured and unsecured debts. Either the plan must provide for total repayment of the unsecured debts, or the debtor must agree to dedicate all of his disposable income to the payment of these debts. In order for a debtor's plan to repay their secured debts to be confirmed, the secured creditors must either approve the plan and retain the lien while payments are made, or repossess the collateral.

Scaling down a farm or fishing operation is often required for successful reorganization. Chapter 12 permits a debtor to liquidate secured assets without the permission of the secured creditor before the confirmation hearing if they have been given notice, provided with a chance to be heard, and the proceeds remitted to the secured creditor

On confirmation of the Chapter 12 plan, both the debtor and the creditors are bound by the terms of the confirmed plan.

Tax Considerations

Legislation creating Chapter 12 does not create a separate tax entity for Chapter 12 debtors. The debtor does not have the option of filing a short year tax return for either their state or the Federal government.

Conversion and Dismissal

Chapter 12 specifically provides that a debtor may voluntarily convert a Chapter 12 bankruptcy case to a Chapter 7 bankruptcy, or dismiss the case at any time (including after the confirmation of the plan).

Chapter 12 provides that after notice and a hearing, the court may dismiss a case for cause if there is:

  • Unreasonable delay or gross mismanagement.
  • Nonpayment of required fees and charges.
  • Failure to file a timely plan.
  • Failure to make timely payments as per the confirmed plan.
  • Denial of plan confirmation and a request for additional time to file another plan.
  • Default of a confirmed plan term by the debtor.
  • Termination of a confirmed plan due to some condition specified in the plan.
  • Continued diminution and absence of a reasonable likelihood for rehabilitation of the estate.
  • Fraud.

Discharge of Debts

After completing all payments under the plan, a Chapter 12 debtor will receive a discharge of all debts that have been provided for in the plan. Any long term debt that extends beyond the life of the plan will not be discharged. In most cases, unsecured debts are discharged at the end of the plan. Any secured debts will remain until they have been completely repaid.

Chapter 12 also provides for a hardship discharge which may be granted even if the debtor fails to complete a plan. Such discharge is granted if the failure to complete the plan is due to circumstances beyond the debtor's control if the unsecured creditors have received as much as they would have through Chapter 7 liquidation, and modification of the plan is not feasible.

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