Chapter 12 bankruptcy helps "family farmers" and "family fishermen" struggling with debt continue operations and avoid foreclosure or a business shutdown. Introduced as a temporary way to help relieve financial pressures on family farmers and fishermen during the mid-1980s, Chapter 12 became a permanent bankruptcy chapter in 2005.
Chapter 12 is a better fit for family farmers and fishermen than a typical business Chapter 11 because it uses the more straightforward Chapter 13 process while allowing Chapter 12 filers to have significantly more debt than they could in a Chapter 13 case. Learn about Chapter 13 debt limitations.
Only family farmers and fishermen can file for bankruptcy under Chapter 12. If you plan to file as an individual, either by yourself or with a spouse, here are the requirements you'll need to meet:
Partnerships and corporations can file for bankruptcy under Chapter 12 if a single family owns more than 50% of the stock or equity. (Debt figures exclude home mortgages and are valid for cases filed between April 1, 2022, and March 31, 2025.)
The most important benefit of filing for Chapter 12 is the debt relief allowing family farmers and fisherment to continue farming or fishing operations. Each case proceeds in a predictable fashion. Here's what you can expect.
If you file as an individual—as opposed to filing under a business name—you'll need to attend a credit counseling course before submitting your bankruptcy paperwork to the bankruptcy court. You'll include the completion certificate with the bankruptcy petition.
A Chapter 12 case begins with the case filing. The "automatic stay" order triggered by the bankruptcy case stops most creditors from calling, sending letters, and pursuing debt collection lawsuits. Learn more about the automatic stay and its limitations.
Soon after, the court appoints a bankruptcy trustee to review documents, monitor operations, and conduct a meeting known as the "meeting of creditors," "creditors meeting," or "341 meeting." The trustee also collects plan payments and disperses them to creditors.
Before the meeting, you'll provide bank statements, profit and loss statements, tax returns, and other financial documents required in a bankruptcy case for the trustee to review. At the meeting, the trustee will verify your identity and ask questions about the bankruptcy filing. Creditors can also ask questions.
You'll have 90 days to file your proposed three-year plan to pay creditors, but you can ask the court to extend the time. The court can also give you up to five years to pay if you can show "cause" or good reason. For instance, most courts will approve a five-plan if you need more time to pay child support or alimony arrearages.
Most filers try to submit the proposed plan before the 341 meeting. If you do, you'll have an opportunity to discuss potential problems with the trustee at the meeting of creditors and make needed adjustments. Learn more about the plan in "Elements of The Chapter 12 Repayment Plan" below.
A proposed plan must be approved or "confirmed" by the bankruptcy court at a hearing set within 45 days of the plan's filing. If the debtor, trustee, and creditors can't resolve a problem, the judge will consider each side's argument at the hearing, although most judges rely heavily on the trustee's recommendations.
The court will continue monitoring the case until you make the required payments. If you file as an individual, you'll also need to complete a debtor education class before the bankruptcy court will close the matter and grant a debt discharge that eliminates debts in accordance with your plan.
The court will dismiss the case without a discharge if the debtor can't obtain plan confirmation or make the required payments. A debtor also can elect to dismiss a Chapter 12 case or convert it to a Chapter 7 liquidation.
The essential parts of a Chapter 12 repayment plan include the following.
Required plan payments. During the plan period, the debtor must turn over all "disposable income" to the Chapter 12 trustee. "Disposable income" in a Chapter 12 case is the difference between the revenue generated by the debtor's farm or fishing operations and the amount reasonably needed to cover business expenses and expenses incurred in the maintenance and support of the debtor's family.
Mortgages and other secured claims. One of the advantages of Chapter 12 is that debtors can "cram down" or reduce secured debt, like farm mortgages and boat loans. Mortgage lenders and other secured creditors must receive the value of the collateral securing the debt. Any balance owed over the collateral's value becomes an "unsecured debt," often paid little or nothing in Chapter 12 cases. Secured debt payments can extend beyond the plan's term, and interest can be reduced to the current market rate.
Trustee fee. Trustees receive a percentage of the funds dispersed to creditors.
Discharge of debt. Chapter 12 plans must meet the "best interests of creditors" test. Under the "best interests" test, creditors must receive at least as much under a Chapter 12 plan as they would in Chapter 7 bankruptcy. As long as the plan meets the "best interests" test, unsecured creditors can be paid pennies on the dollar or nothing at all.
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Updated April 21, 2022