Congress enacted chapter 12 of the Bankruptcy Code to mitigate financial circumstances that exist for many farmers in America. Farming and debt often go hand in hand. Chapter 12 operates much like chapters 11 and 13 of the bankruptcy code, in that it allows a debtor to file a plan of reorganization that allows a debtor to retain its assets while repaying creditors all or a portion of their debts over a set period of time. However, chapter 12 provides a middle ground between the short time frame and limited powers of chapter 13 and the longer time frame and broader powers in chapter 11.
To qualify to be a chapter 12 debtor, the debtor must be a “family farmer” (or family fisherman) with regular annual income. Regular annual income is defined in the bankruptcy code as annual income sufficiently stable and regular to enable the farmer to make payments under a chapter 12 plan. Additionally, an individual family farmer must have less than $3,544,525.00 million in total debts, at least 50% of which must arise from a farming operation (excluding debt for principal residence), and must derive 50% of their income from a farming operation to be eligible to file a chapter 12 bankruptcy.
Chapter 12 allows family farmers a reasonable period of time to restructure their financial position for the benefit of all creditors. The chapter 12 debtor continues in possession of its assets and continues to operate its business. Typically, a chapter 12 plan term is 3 to 5 years and acts as a new contract between the debtor and its creditors regarding how debts are repaid. Chapter 12 also allows a debtor to repay its secured creditors over a period of time greater than 5 years.
Chapter 12 is a powerful tool for operators of small farms to resolve debt problems. An experienced bankruptcy attorney will be able to advise a family farmer or fisherman on whether they qualify for chapter 12 bankruptcy and ensure all the requirements are met.