Business Bankruptcy Law
Chapter 12 Bankruptcy
Unpredictability is a great concern for farmers. Nothing is certain when your livelihood depends on the weather, disease, pests, and market prices. When a family farm business needs a fresh start, a Chapter 12 bankruptcy is an option. Bankruptcy is a way to reorganize, pay off debts, and recover the farm after a few rocky years.
Bankruptcy law is complicated. It’s easier to navigate with the help of a local bankruptcy law attorney.
Chapter 12 bankruptcy is a bankruptcy plan specifically for family farms or fishing operations. Chapter 12 bankruptcy is like Chapter 13 bankruptcy but for farmers with regular annual income instead of wage earners. Congress created Chapter 12 under the bankruptcy code after finding Chapter 11 bankruptcy was not a viable option for insolvent farmers.
Under Chapter 12, filing farmers or fishermen come up with a repayment plan to pay creditors in installments over a period of three to five years. Chapter 12 requires repayment of all disposable income (unless there are payments for child support and alimony) over three years. With cause, the repayment plan can extend to five years.
Bankruptcy is a debt relief option to get a fresh start after a few bad years. Chapter 12 reorganization bankruptcy can stop creditors from taking action to repossess property. This can give you time to get your financial affairs in order until the farm can become profitable.
Chapter 12 is for the adjustment of debts for a “family farmer” or “family fisherman.” These can be individuals, couples, corporations, or partnerships. There are different eligibility requirements for individuals or partnerships.
For individuals or individuals with a spouse, eligibility requires you to:
- Be engaged in a fishing or farming operation
- Have a total debt limit that does not exceed a certain amount
- Have at least a certain percentage of the total debts fixed in relation to a farming (50%) or commercial fishing operation (80%)
- Have more than 50% of your gross income coming from the farming or commercial fishing operation
Farming corporations can still use Chapter 12 bankruptcy, but there are eligibility limitations, including that stock can’t be publicly traded.
The bankruptcy process for Chapter 12 is supposed to be more streamlined, less complicated, less expensive, and more helpful than other bankruptcy options. The first step in bankruptcy is credit counseling. You have to receive credit counseling within 180 days before filing. But there are emergency exceptions. You file the debt management plan with the bankruptcy court.
You file a bankruptcy petition and filing fee with the bankruptcy court, which includes the following:
- Your assets and liabilities
- Your expenditures and incomes
- Your unexpired leases and contracts
- A statement of your financial affairs
Filing the bankruptcy puts an automatic stay on most collection actions. Creditors can’t sue you for debts, garnish wages, or harass you with collections phone calls.
Within 21 to 35 days after filing, the bankruptcy trustee holds a meeting of creditors. In some cases, the Chapter 12 trustee can have up until 60 days to hold the meeting. During the meeting, you must answer any questions by the creditors under oath. You and your creditors generally come up with an approved repayment plan to settle debt payments over the next three to five years.
You will make a repayment plan and file it with the bankruptcy court within 90 days. The plan provides for set payments distributed by the trustee to creditors, under the terms of the plan. Creditors get paid based on priority to:
- Priority claims
- Secured creditors
- Unsecured creditors
Priority claims are for taxes and the costs of bankruptcy proceedings. Secured creditors maintain a security interest in certain property if you don’t make the required plan payments. Secured creditors are paid at least as much as the collateral promised for the secured debt (cram down). Unsecured debts don’t have to be repaid in full.
After filing the plan, the bankruptcy judge at a confirmation hearing decides if the plan is workable and confirms the plan. If the plan isn’t approved, you can modify it or convert the filing to a Chapter 7 bankruptcy.
At the end of the payment plan, you receive a discharge of all debts under the plan. You are then released from all debts under the bankruptcy. Some debts are not dischargeable, including alimony, child support, and money from false financial statements.
In some cases, the court can still discharge Chapter 12 debt even if you have not completed the payment plan. If you can’t make payments because of circumstances beyond your control and without fault, the court can grant a hardship discharge.
There are alternatives to Chapter 12 bankruptcy, even for family farms or fishing operations that qualify. If the debt is primarily limited to a small number of lenders, you can try to negotiate a payment plan to pay down most of the debt without having to go through bankruptcy court.
If you have a combination of farm debt and personal debt, Chapter 7 filing could allow you to discharge all debt. But with certain exemptions, Chapter 7 liquidates your property, which could include most of the farm’s assets.
If you have questions about which type of bankruptcy could provide the most debt relief for your family farm operation, talk to an experienced bankruptcy attorney, who can handle your bankruptcy case from beginning to end. Your lawyer can help you prepare a repayment plan to relieve you of debt so you can keep the farm.
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