Chapter 12 Bankruptcy

What is chapter 12 Bankruptcy?

Chapter 12 bankruptcy is for the farms and fisheries. This means this bankruptcy assists the owners of farms and fisheries reorganize their finances while keeping the ownership of their assets. After filing for bankruptcy, the owners need to work with the bankruptcy trustee and creditors to come up with payment programs. The repayment period in this bankruptcy can vary from three to five years.

Such a type of bankruptcy applies to farms and fisheries under sole proprietorship (married or single) and under partnerships and corporations. In comparison to Chapter 13, Chapter 12 gives more flexibility in terms of payment as it considers the seasonal nature of the farming and fishing business.

History of Chapter 12 Bankruptcy

Before 1986 there was no specific financial protection available to the farmers. The farmers had to go for Chapter 13, which was expensive as it was primarily for big companies and generally dealt with relatively small outstanding debts.

Thus, the U.S. government came up with the Chapter 12 bankruptcy in 1986 to help farms and fisheries. Its objective was to help farms and fisheries against the rising debt level in the farming industry. In 1983, the industry debt rose to about $216 billion, primarily due to high commodity prices.

Chapter 12 bankruptcy act was supposed to end in 1993. The authorities, however, extended it until it became permanent law in 2005.

Eligibility for Chapter 12 Bankruptcy

To be eligible to file for bankruptcy, the farms and fisheries need to meet some requirements. These requirements include the filer must be in the farming or commercial fishing business. The total debt for farmers must not be over $11,097,350 and $2,268,550 for fishermen (for cases between April 1, 2022, and March 31, 2025).

Also, over 50% of their gross income should have come from their farming or fishing operations in the last year. Also, half of their total debt should be for their business. This means debt for a home will not count.

The prescribed debt levels for those planning to file this bankruptcy keep changing depending on the economic scenario and commodity prices. For instance, the Farmer Family Relief Act of 2019 raised the debt limit from $3.3 million to $10 million. Such a rise in the debt limit was the result of rising U.S. farm debt, a trade war with China, adverse weather conditions, and more.

All bankruptcy filers (individual, corporation, or partnership) must not fail to appear in the court. Also, they need to obey all court orders and get credit counseling within 180 days before filing. The counseling must be from an approved agency.

Chapter 12 Bankruptcy: Process

The process of filing for this bankruptcy is similar to other bankruptcies. To start with, the farmer or fisherman has to file a petition. The petition should accompany schedules, financial statements, a list of debts and creditors, and any other document that the court may want. The filer needs to submit these documents and any fees to the bankruptcy court clerk.

After filing the petition, the court will assign a trustee. The responsibility of the trusty includes checking documents, reviewing the operations of debtors, making recommendations to the court, and collecting and distributing payments.

The trustee will then hold meetings with the creditors. The trustee and creditors can question the filer about their petition and financial conditions during the meeting. All this information will be helpful in creating the payment plan. The trustee will also measure the assets of the filers, and the court may then use them to pay the due debt.

Also, like other bankruptcies, this bankruptcy triggers an automatic stay provision. This limits creditors from collecting debt directly from the filer. Along with protecting the debtor, the automatic stay in Chapter 12 also secures anyone liable for any of the Chapter 12 debtor’s consumer debts. Such debts could be for personal, family, or household purposes and not for meeting business needs.

The bankruptcy filer needs to hand over all their “disposable income” to the trustee during the payment period. The “disposable income” is the difference between the revenue that the filer generates from the operations and the amount they spend on business expenses and supporting the family. The trustee retains some fee from the payment that the debtor makes and distributes the remaining among the creditors.

Payment and Discharge

Once all the formalities are over, the debtor will have to come up with a payment plan to pay the debt in three to five years. The debtor must come up with a plan in less than 90 days from the date of filing the bankruptcy. However, the bankruptcy court can give more time under specific circumstances.

The plan must cover secured and unsecured debts as per the requirements of the bankruptcy law. Payment to secured debt should equal at least the value of the collateral. Payment towards secured debt could stretch beyond the plan term. The payment to unsecured creditors must at least equal to the payment such debts would have gotten under the Chapter 7 bankruptcy.

The bankruptcy judge should approve the payment plan from the debtor. After the confirmation hearing (within 45 days of the date of filling the payment plan), the debtor can start making the payments. After this, the trustee can forward those payments to the creditors.

In this bankruptcy, the debtor doesn’t get the discharge until they make all the payments. There is, however, one exception to this rule, and it is “hardship discharge.” Under this, the debtor gets a discharge if they can give evidence that they were unable to make the payments with no fault of theirs. Or, the reason for not making full payments was not under their control, such as severe illness. This exception, however, applies only if the creditors get at least as much as they would have got under the Chapter 7 bankruptcy. We call such a rule meeting the “best interests of creditors” test.

So, once the debtor makes all the payments, they get a discharge. A debtor, however, can also choose to dismiss the Chapter 12 case or change it into Chapter 7.

Most of the obligations are dischargeable under this bankruptcy. However, a few obligations are non-dischargeable even under this bankruptcy, such as child support and alimony.

Benefits of Chapter 12 Bankruptcy

Following are the benefits available under the Chapter 12 bankruptcy:

  • Debtors are able to cram down the secured debt. This means the debtor needs to pay the present value of the collateral and not the full debt.
  • If a debtor proposes the repayment plan in accordance to Chapter 12, then creditors can’t vote against it. Moreover, there is no need to get approval for the payment plan from the creditors.
  • Debtors can sell or lease assets in the normal course of business without getting permission from the court. Moreover, farmers can treat the tax claims from the sale of farm assets as unsecured claims.
  • The debtor may even get a discharge if they fail to make the full payment because of medical illness or natural disasters.

Final Words

Chapter 12 bankruptcy is a quick and relatively easier way for farmers to reorganize their finances. Farmers also benefit from a seasonal repayment schedule, as well as lower bankruptcy costs in comparison to other bankruptcies. Moreover, farmers get more repayment flexibility than would otherwise be available under the Chapter 7 or Chapter 11 bankruptcy.

Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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