Definition and Examples of Chapter 12 Bankruptcy
Chapter 12 bankruptcy was designed as a response to difficulties suffered by farmers and fishermen in the 1980s. It shares some aspects of Chapter 11 and Chapter 13 bankruptcies, but it's structured to work better for the unique needs of farmers and fishermen.
Note
A family farmer or fisherman gains protection from creditors and collectors when they're approved for Chapter 12. They can reorganize their debts into a three- or five-year payment plan.
Two types of farming operations can qualify for Chapter 12 bankruptcy.
An Individual or Married Couple
An individual or a married couple witha farming or commercial fishing operation and regular annual income can file for Chapter 12. Some rules apply:
- Their total debts can't exceed $4,153,150for a farmer, or $1,924,550for a fisherman.
- At least 50% of their debts must come from the farming operation if they're a family farmer.
- At least 80% of their debts must come from the fishing operation if they're a family fisherman.
- More than 50% of their gross income in the prior tax year must come from the farming or fishing operation.
A Corporation or Partnership
A corporation or partnership can also qualify as a family farmer or fisherman under certain circ*mstances:
- More than half of the stock must be owned by one family and its relatives. They must actively conduct business operations.
- More than 80% of the company's value must be tied to its farming or fishing operations.
- Total debt limits and percentages are the same as for individual farmers and fishermen.
- The corporation can't issue publicly traded stock.
Regardless of whether the filer is an individual, corporation, or partnership, they must not have willfully failed to appear in court. They must comply with all court orders or have been voluntarily dismissed after creditors sought payment through the bankruptcy court within the last 180 days. They also must have received credit counseling from an approved agency within 180 days before filing.
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 avoluntary 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.
Note
If you have a credit card on which your sibling is also liable, they would also be protected by the automatic stay under Chapter 12, even though they didn't personally file the bankruptcy. This is often called a "co-debtor stay."
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.
The Chapter 12 Plan
The debtor must propose a Chapter 12 plan that pays off their debts over a period of three or five years. These can include secured and unsecured debts. The plan must pay creditors within the requirements of bankruptcy law. Secured creditors must be paid at least the value of their collateral. Unsecured creditors must receive as much as they would have been entitled to under a Chapter 7 liquidation bankruptcy.
Note
A farmer or fisherman filing for Chapter 12 must submit their payment plan within 90 days of filing their petition for bankruptcy.
A bankruptcy judge must also confirm the plan. The Chapter 12 debtor must make regular payments to the trustee after a confirmation hearing. The trustee will then make payments to creditors.
A Chapter 12 Discharge
A Chapter 12 debtor doesn't receive a discharge until all of their plan payments have been made, but there's an exception to this rule, called the "hardship discharge." It permits a discharge if the debtor can prove that they failed to make all plan payments due to no fault of their own. The cause was not within their control. One example might be a severe illness. Creditors also must have received at least as much as they would have under Chapter 7 liquidation.
Key Takeaways
- Chapter 12 bankruptcy allows family farmers and fishermen who are in financial distress to discharge their debts over three or five years.
- It combines aspects of Chapter 11 and Chapter 13 bankruptcies while allowing a more flexible payment plan due to the seasonal nature of these businesses.
- Debtors don't have to liquidate assets under Chapter 12 as long as they stick with the payment plan.
- Creditors and collectors may not take action against Chapter 12 debtors without permission of the court.
