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Chapter 12 Bankruptcy – Background

Chapter 12 Bankruptcy was added to the Bankruptcy Code in 1986 by the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. The Act which went into effect on November 26, 1986 was to originally expire on October 1, 1993. However, it was extended a number of times without expiring until it was made permanent by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

The modification of the bankruptcy code by adding Chapter 12 Bankruptcy were intended as an emergency response to tightening agricultural credit in the early and mid 1980s. Chapter 12 provides additional benefits not available under Chapter 13 and Chapter 11. These benefits include higher debt ceilings than those under Chapter 13, and more advantageous exemptions. It enables financially distressed family farmers and fishermen to propose and carry out a plan to repay all or part of their debts.

Chapter 12 is designed for “family farmers” or “family fishermen” with regular annual income. The purpose of the requirement of a regular annual income is to ensure that the debtor’s annual income is sufficiently stable and regular to permit the debtor to make payments under a Chapter 12 plan. However, Chapter 12 makes allowance for situations in which family farmers or fishermen have income that is seasonal in nature. Only the debtor may file a petition under chapter 12 because relief under the chapter is voluntary.

“Family farmers” and “family fishermen” fall into two categories under the Bankruptcy Code. They are;(1) an individual or individual and spouse and (2) a corporation or partnership. In order to qualify for relief under Chapter 12, Farmers or fishermen falling into the first category must meet each of the criteria listed in the code as of the date the petition is filed. The individual or husband and wife must be engaged in a farming operation or a commercial fishing operation and the total debts of the operation must not exceed $3,792,650 in case of a farming operation or $1,757,475 if a commercial fishing operation. At least 50% of the total debts of a family farmer and 80% of the total debts of a family fisherman must be related to the farming or commercial fishing operation. Also, more than 50% of the gross income of the individual or the husband and wife for the preceding tax year (or, for family farmers only, for each of the 2nd and 3rd prior tax years) must have come from the farming or commercial fishing operation.

In order for a corporation or partnership to fall within the category of debtors eligible to file as family farmers or family fishermen, it has to meet certain criteria. They are that more than one-half the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives and they must be conducting the farming or commercial fishing operation. Also, more than 80% of the value of the corporate or partnership assets must be related to the farming or fishing operation. The total indebtedness of the corporation or partnership must not exceed $3,792,650 in case of a farming operation or $1,757,475 in case of commercial fishing operation. At least 50% for a farming operation or 80% for a fishing operation of the corporation’s or partnership’s total debts, exclusive of debt for one home occupied by a shareholder, must be related to the farming or fishing operation. Additionally, if the corporation issues stock, the stock cannot be publicly traded.

Pursuant to Chapter 12, debtors propose a repayment plan to make installments to creditors over three to five years. A plan may not provide for payments over a period longer than five years in any circumstances. A debtor cannot file under Chapter 12 or any other chapter if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

A debtor under Chapter 12 or any chapter of the Bankruptcy Code may file for Bankruptcy only if such debtor received credit counseling from an approved credit counseling agency within 180 days before filing, either in an individual or group briefing. However, a debtor may be granted exceptions in emergency situations or where the U.S. trustee or bankruptcy administrator has determined that there are insufficient approved agencies to provide the required counseling.

Inside Chapter 12 Bankruptcy – Background