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Chapter 12 Bankruptcy – What is it?

What is a Chapter 12 anyway and who is eligable? Chapter 12 of the U S Bankruptcy Code basically is designed for “family fishermen” with “regular annual income”. It enables financially stressed family farmers and fishermen to design a plan to repay all or part of their debts. Much like a chapter 13, the debtors propose a repayment plan to make installment payments to creditors over a 3 or 5 year period. Generally, the plan is for 3 years unless the court approves the plan for the longer period for “cause”.

If the plan proposes to pay 100% of domestic support claims (child support and alimony), if any, it must be for five (5) years and include all of the debtors disposable income. In no case will a plan go over five (5) years. Chapter 12 eliminates most of the barriers debtors would face in a chapter 11 or chapter 13 of the Bankruptcy Code. Chapter 12 is more streamlined, less complicated, and less expensive than chapter 11 would be which is suited for larger corporations and businesses. Family farmers and fishermen find a chapter 12 to be more of an advantage than a chapter 13 because a chapter 13 is designed for wage earners with smaller debts than those facing family farmers and fishermen. Congress sought to combine the features of the Bankruptcy Code, which can proved a framework for a successful reorganization.

Under a chapter 12, only family farmers and fishermen with a regular annual income can file a petition under this chapter of the Bankruptcy Code. The reason this requirement is in place is to ensure the debtors annual income is sufficiently stable and regular in order to maintain payments under the chapter 12 plan, however chapter 12 makes allowances for family farmers and fishermen that have seasonal income in nature. Relief under this chapter is only voluntary and only the debtor may file the petition.

Under the Bankruptcy Code, family farmers and fishermen fall into two categories, and individual or an individual and spouse and the other a corporation or partnership. Farmers and fishermen falling into the first category must meet the four criteria on the date the petition is filed in order to qualify under this chapter.  The first is the individual or husband and wife must be engaged in a farming operation or a commercial fishermen operation, second, the total debts both secured and unsecured of the operation must not exceed $3,792,650. (if a farming operation) or $1,757,475 (if a commercial fishing operation). Third, if a family farmer at least 50 % or if family fishermen 80% of the total debts that are fixed in amount (which does not include the home) must be related to the operation. And finally, more than 50% of the gross income of the individual or the husband and wife for the preceding tax year (or for family farmers only, 2nd and 3rd prior tax years), must have come from farming or commercial fishing operations.

In order for a corporation or partnership to fall into the second category of debtors eligible to file under this chapter, they must meet six (6) criteria as of the date of filing the petition. First, more than one-half of the outstanding stock or equity n the corporation or partnership must be owned by one family or by one family and its relatives. Second, the family or the family and its relatives must conduct the farming or fishing operation. Third, more than 80% of the value of the corporate or partnership assets must also be related to the operation.

Fourth, the total indebtedness of the corporation or partnership must not exceed $3,792,650 (if farming operation) or $1,757,475 (if a commercial fishing operation). Fifth, at least 50% for a farming or 80% for a fishing operation of the corporation’s or partnership’s total debts which are fixed in the amount (not including one home occupied by a shareholder), must be related to the operations. Finally, if the corporation issues stocks the stock cannot be publically traded.

There is a lot more to a chapter 12 of the Bankruptcy Code as this is just the tip of the iceberg so to speak. If you are a family farmer or fisherman and are thinking about filing bankruptcy, you need to consult with an experienced and local attorney for advice.


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