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Chapter 12 Bankruptcy: Reorganizing The Family Farm or Fishery

Updated: Jul 9

By Ashley Ellixson


Green tractor in front of farm (Photo by Edwin Remsberg).

This article first appeared in the July 26th edition of the Delmarva Farmer.


I know what you may already be thinking: bankruptcy is such a gloomy topic. It is just that, gloomy. However, sometimes it may be the best option to enable the family farm to continue operating far into the future. Today, I will walk through what chapter 12 bankruptcy is and the how, who, and what questions surrounding the whole process. It is important, however, to consultant an attorney on your unique situation before moving forward with a bankruptcy filing.


Chapter 12 was designed to meet the economic realities of the family farm or family fishery. Although created in 1986 in response to the nationwide farm financial crisis, Chapter 12 was made permanent only recently, in 2005. Chapter 12 makes it possible for family farms and fisheries to restructure or reorganize to become viable in the future despite a current hardship or economic crisis. Chapter 12 bankruptcy, as opposed to other chapters of bankruptcy, is designed for “family farmers” or “family fishermen” with “regular annual income.” It enables financially distressed family farmers and fishermen to propose and carry out a plan to repay all or part of their debts.


Who Can File for Chapter 12 Bankruptcy?

Family farmers and fishermen fall into two categories for qualification purposes:

  1. Individual or Individual & Spouse

  2. Must be engaged in farming or commercial fishing operation

  3. Total debts of the operation must not exceed $4,031,575, or $1,868,200 if they are fishermen

  4. At least 50% of debts must be related to farming operation, or 80% of total debts on commercial fishing operations (in both cases excluding home mortgages), and

  5. At least 50% of gross income from preceding tax year must come from farming

  6. A Corporation or Partnership

  7. More than 50% of outstanding stock or equity must be owned by one family or by one family and relatives

  8. Family must conduct farming or fishing

  9. More than 80% of value of assets must be related to farming or fishing

  10. Total debts of the operation must not exceed $4,031,575, or $1,868,200 if they are fishermen

  11. At least 50% of debts must be related to farming operations or 80% for fishing operations

  12. If there is stock, it cannot be publically traded

What Is the Process?

The bankruptcy code requires a precise process to follow during any chapter of bankruptcy. The exact order of events are:

  1. Farmer/fisherman receives credit counseling from an approved credit counseling service

  2. Farmer/fisherman files a Chapter 12 petition with the bankruptcy court

  3. 20-35 days after filing petition, the bankruptcy court holds a meeting of creditors

  4. Within 90 days of filing the initial petition, the farmer must submit a reorganization plan to the court

  5. The court confirms or rejects the plan

  6. If confirmed, the farmer/fisherman will stay in bankruptcy 3-5 years

  7. The farmer/fisherman is discharged from bankruptcy and continues to make long term debt payments

What Happens After the Three or Five Years?

The debtor (farmer or fisherman) will receive a discharge after completing all payments under the chapter 12 plan as long as the debtor certifies all domestic support obligations were paid. To review, domestic supports include alimony or child support. Alternatively, the court may grant a “hardship discharge” to a chapter 12 debtor even though the debtor has failed to complete plan payments. This is available only to a debtor who failed to complete plan payments due to circumstances beyond the debtor’s control and through no fault of the debtor. For example, a farmer or fisherman with an injury or illness precluding employment may result in a hardship to repay debts.

Possibly one of the most advantageous parts of Chapter 12 is the ability of the farmer or fisherman to reduce secured debt to the value of the collateral. For example, a farmer borrows $400,000 to purchase dairy cows which provide the collateral to secure the loan. Those dairy cows are determined to be worth $200,000 at the time of bankruptcy — thus the secured debt would be reduced to $200,000 while the remaining $200,000 would be considered unsecured debt.

Another point to remember is that a husband and wife may file a joint petition or individual petitions. The official forms for Chapter 12 bankruptcy may be purchased at legal stationery stores or downloaded at www.uscourts.gov/bkforms/index.html.

Again, it is important to first consult an attorney with bankruptcy expertise. This post is not to be considered legal advice or a thorough explanation of all Chapter 12 bankruptcy details.


Resources:

http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-12-bankruptcy-basics


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