Chapter 12 Bankruptcy: How it Works

By James Parker
August 25, 2021

The bankruptcy system has niche rules for specific circumstances that are designed to give relief to certain groups. One such process—Chapter 12 bankruptcy—exists to provide relief to those who feed the nation.

Chapter 12 bankruptcy is described by the U.S. Courts as a bankruptcy process “designed for ‘family farmers’ or ‘family fishermen’ with ‘regular annual income.’ ” Chapter 12 has been designed to be more streamlined, less complicated, and specialized for these specific groups.

Chapter 12 is less expensive than bankruptcy chapters that cater to large corporations such as chapter 11. Chapter 12 is also designed to handle larger debts than processes like chapter 13. This is helpful to farmers and fishermen since they usually have larger debts than an average wage earner.

Similar to Chapter 13 bankruptcy, Chapter 12 bankruptcy helps farmers and fishermen deal with their debts through a multi-year payment plan. The plan must be at least three years in length but can be extended for a cause the court judges appropriate.

These extensions can be requested if the filer has domestic support claims like child support or alimony that generally consumes all of the filer’s disposable income. Chapter 12 also explicitly states that “in no case may a plan provide for payments over a period longer than five years.”

The court recognizes “family farmers” and “family fishermen” as either: 

  1. An individual or individual and spouse 
  2. A corporation or partnership

Individual or Individual and Spouse

In order to qualify as an individual or individual and spouse, the filer must meet four criteria:

  1. The individual or partners must be engaged in a farming or commercial fishing operation.
  2. The total debts of the operation must not exceed a certain limit ($4,153,150 for farmers or $1,924,550 for fishermen).
  3. A certain proportion of the total debts, not including mortgages, must be related to operating costs (for farmers at least 50%, and for fishermen at least 80%).
  4. More than 50% of gross income for the preceding tax year must have come from farming or fishing (as well as the 2nd and 3rd prior tax years for farmers).

If these criteria are met, then the filer can begin the process of Chapter 12 bankruptcy as an individual or individual and spouse.

Corporations and Partnerships

Corporations and partnerships have their own set of criteria. Those include:

  1. At least 51% of company stock or equity must be held by the family and its relatives.
  2. The family and its relatives must conduct the farming or fishing operation.
  3. More than 80% of the value of the corporate or partnership assets must be related to the farming or fishing operation.
  4. The total debts must not exceed a certain limit ($4,153,150 for farmers or $1,924,550 for fishermen).
  5. A certain proportion of the total debts, not including mortgages, must be related to operating costs (for farmers at least 50%, and for fishermen at least 80%).
  6. The corporation’s stock cannot be publicly traded.

If these criteria are met, then the filer may begin the Chapter 12 process as a partnership or corporation.

If you need to file for Chapter 12 bankruptcy protection, you will need the help of a bankruptcy attorney. An experienced bankruptcy attorney can help you classify your assets properly, construct the best possible repayment plan, and eliminate as many of your debts as possible. The best place to find an expert bankruptcy attorney is Attorney at Law.

At AAL, our nationwide network of attorneys and law firms can match you with an experienced bankruptcy attorney in your area. Our partners have the resources, legal expertise, and experience to handle any bankruptcy. 

In addition to a distinguished track record and capable associates, our partners have unparalleled client care. We understand the stresses that come with bankruptcy, and that’s why we only partner with firms that make it their priority to ensure the proceedings are quick, efficient, and as painless as possible. 

Don’t wait. Contact AAL today for a free, no obligation consultation and begin your journey to financial recovery.

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