If you are a farmer or a fisherman facing financial difficulties, you may want to consider filing for bankruptcy under Chapter 12 rather than Chapter 7 or Chapter 13. Chapter 12 is a form of bankruptcy that was made permanent in 2005. It is similar in many respects to Chapter 13, but it is limited to a very small sector of the population, covering family farmers and family fishermen who have regular annual income. In a typical year, Chapter 12 bankruptcies account for less than one-tenth of 1 percent of the total bankruptcies filed in the U.S.
You can file under Chapter 12 as either an individual or an entity. If you want to file as an entity, you will need to show that a single family owns more than half of the stock or equity in the entity. A farmer or fisherman can qualify when their income is only seasonal if they will be able to make consistent payments under the plan. Separate debt limits apply to farmers and to fishermen, which are currently a few million dollars but are subject to change. You must receive over half of your total income from your farming or fishing operation. Also, if you are a farmer, half of your total debts must be based on your farming operation. If you are a fisherman, by contrast, 80% of your total debts must be based on your fishing operation. (These percentages exclude home mortgages.)
Repayment Plans Under Chapter 12
Your business can continue operating throughout the course of the Chapter 12 proceeding. Within 90 days of filing under Chapter 12, you must propose a repayment plan to the court. As with Chapter 13, a Chapter 12 repayment plan lasts for three to five years. The court will need to hold a confirmation hearing within 30 days from when you present the plan to the court. This will give the Chapter 12 bankruptcy trustee an opportunity to review the plan and recommend whether the court should approve it. The court generally will follow the trustee’s recommendation, although it is not required to follow it.
Again similar to Chapter 13, Chapter 12 requires the debtor to turn over all of their disposable income to the bankruptcy trustee. To calculate your disposable income, you will need to subtract reasonably necessary business expenses and family expenses from the total income generated by your business. The disposable income will be used to cover payments to creditors.
Two other ways in which Chapter 12 is similar to Chapter 13 are the best interests test and the ability to cram down a debt. The best interests test requires a creditor to be paid as much under the repayment plan as it would be paid in a liquidation bankruptcy under Chapter 7. (Read more here about how this test works.) A cramdown allows you to reduce a secured debt to the value of the asset attached to the debt, while reclassifying the remaining amount of the debt as unsecured. (Read more here about cramdowns and their advantages and limitations.)
Closing a Chapter 12 Case
A Chapter 12 case will be closed once the debtor has completed their required payments to the trustee. The court will grant a discharge that frees the debtor from liability for most debts not covered by the repayment plan. Some types of debts, such as child support and taxes, cannot be discharged under Chapter 12, which is true of other types of bankruptcy.
If the court does not approve the debtor’s plan, or if the debtor does not keep up with payments, the Chapter 12 case will be dismissed. Sometimes a debtor chooses to voluntarily dismiss a case when they are unsure about their ability to keep up with their obligations. They may then file under Chapter 7 instead.