Advantages of Chapter 12 Over Chapter 13 Bankruptcy

If you are a family farmer or fisherman, Chapter 12 bankruptcy may be a better option than Chapter 13.

Chapter 12 bankruptcy is very similar to Chapter 13 bankruptcy, but is available only to family farmers and family fishermen/women. Both Chatper 12 and Chapter 13 are reorganization bankruptcies, which means filers keep their property and repay part or all of their debts through repayment plans that last between three and five years.

But because Chapter 12 has several advantages over Chapter 13 bankruptcy, if you are a family farmer, Chapter 12 bankruptcy may be the better option.

How Chapter 12 and Chapter 13 Bankruptcy Work

In both types of bankruptcies, you provide the court with detailed information about your income, expenses, property, debts, and other financial affairs. A trustee is then appointed to oversee your case. You get to keep your property (including your farm). In return, you must propose a plan to repay your debts (in part or in full depending on a number of factors) over three to five years. After completing the plan, all remaining dischargeable debts (some debts cannot be discharged in bankruptcy) are wiped out.

(To learn more about who qualifies as a family farmer or fisherman, and how Chapter 12 works, see Chapter 12 Bankruptcy for Farmers & Fishermen. For more on Chapter 13, visit our Chapter 13 Bankruptcy topic area.)

Should Farmers File for Chapter 12 or Chapter 13 Bankruptcy?

In most cases, family farmers are better off filing for Chapter 12 bankruptcy rather than Chapter 13. This is because Chapter 12 has several advantages.

Debt Ceilings Are Higher for Chapter 12 Bankruptcy

The debt limits for Chapter 13 eligibility are often too low for those owning and operating farms. In Chapter 13, your secured debts cannot exceed $1,184,200 and your unsecured debts cannot exceed $394,725 (as of April 2016). The debt ceiling to file for Chapter 12 is much higher at $4,153,150 (as of April 2016).

More Extensive Cramdown Rights in Chapter 12

A "cramdown" in a Chapter 13 and Chapter 12 bankruptcy allows you to reduce the principal balance of a debt to the value of the property it is secured by. For example, say your car is worth $2,000 but your car loan balance is $5,000. You can reduce (cram down) your car loan $2,000 (the remaining $3,000 becomes part of your unsecured debt.)

Cramdown is a very powerful tool for bankruptcy filers. But In Chapter 13, the court's power to cramdown loans has limits. It cannot be used to reduce a mortgage secured by your principal residence and recent car loans. (To learn more about how cramdowns work and the limits in Chapter 13, see Reducing Loans and Nonresidential Mortgages In Chapter 13.)

In Chapter 12 bankruptcy, the court has unrestricted authority to cram down secured debts. This means you can cram down mortgages on your farm and home and reduce loans on your farm equipment and recent cars, for example.

More Flexibility for Paying Off Secured Debts in Chapter 12

Another advantage of Chapter 12: Secured debts that extend beyond the plan period can be modified without having to pay them all off in the plan. That is, the lower payments can extend beyond the plan until the debt is paid off in the normal course of time.

More Flexibility in Making Plan Payments in Chapter 12

In Chapter 13 bankruptcy, you make a monthly plan payment. In Chapter 12 bankruptcy, you can schedule plan payments around farm production cycles.

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