Who can file for Chapter 12 bankruptcy? Chapter 12 is not your average consumer bankruptcy. Instead, it is reserved for those designated as family farmers or fishermen. You must have a regular income from these sources and prove you face financial distress to qualify. Also, Chapter 12 is not a bankruptcy that erases your debts. Instead, you will plan out repayments for most of your obligations through this program.
It is your job to propose a repayment plan in Chapter 12; Then you will wait for court approval. The program usually spans for over a three-year period unless the courts grant a longer time based on your situation.
The Importance of Chapter 12 for Farmers and Fishers
For years, bankruptcy laws were not designed to protect fishermen and farmers in the country. Luckily, once Chapter 12 was established, family farmers and fishermen had a way to restructure and pay off debts.
Chapter 12 did not come about until 1986 when there was a bottleneck in the agricultural credit industry, which put additional economic pressure on fishermen and farmers in the country. Back then, it was only a temporary provision. In 2005, Chapter 12 was made permanent so that fishermen and farmers could file for a bankruptcy a lot like the consumer’s Chapter 13 option.
Do You Qualify for Chapter 12 Bankruptcy?
Even if you are a full-time farmer or fisherman, you may not qualify under Chapter 12 laws if you do not meet specific criteria. Chapter 12 is extremely limited and few debtors qualify. In fact, in 2011 there were 1.4 million bankruptcy cases filed, but only 637 were for Chapter 12.
To receive protection under Chapter 12, you must have a regular annual income as a fisherman or farmer. Your yearly regular salary could be seasonal too, but you must show that the income is stable and consistent so that you can make payments through the proposed repayment plan you make.
Under Chapter 12, you can be married or single, in a corporation, or in a partnership. However, you must still meet specific criteria, including:
- Operations – Prove that you are part of a commercial fishing or farming operation and that farming or fishing is not a hobby or part-time job.
- Debt Total – Your debts cannot exceed the threshold set by the government. As of April 2016, the threshold was $4,153,150 for farmers and $1,924,550 for fishers.
- Debts Owed – The percentage of your debts owed will also play a role in determining your eligibility. You must owe 50 percent or more of your debts for your farming operations or 80 percent for commercial fishing – your home mortgage does not count toward this. Therefore, if less than 50 percent of your debts are for farming, you would not qualify for Chapter 12 protection.
- Overall Income – More than 50 percent of your annual household income must come from farming or fishing.
A partnership or corporation could not file for Chapter 12 bankruptcy unless a single family owns that operation and does so by over 50 percent of the shares. Owning under 50 percent of the shares in that farming or fishing operation would disqualify you from Chapter 12.
How Does Chapter 12 Bankruptcy Work?
When you are ready to file for Chapter 12 bankruptcy, your attorney will file a voluntary petition to the court for relief. While you wait for court approval, you would continue operations and you will still do so long after you file for bankruptcy. This is not a liquidation. Therefore, you would continue your business.
The courts then appoint a trustee to your case. The trustee will review documents, monitor your business, advise the court on your financial situation and operations, and collect payments to disperse to your creditors in the plan.
You have 90 days to propose a plan and get it approved from the date you file the initial petition. In some situations, the courts will grant an extension, but it is in your best interest to propose a repayment plan early in case the court rejects your first plan.
How Does the Chapter 12 Repayment Plan Work?
Once approved, your debts are restructured like that of a Chapter 13 bankruptcy case. You propose a plan to pay your creditors over a three-year span, which is the minimum, but you may have up to five years to complete it. If you have domestic support obligations, then the plan must extend to the five-year mark.
Court Confirmation Is Required
All repayment plans are subject to court approval. You will have a hearing for confirmation, which usually occurs within 45 days after you submit your plan. Before that hearing, your trustee will look over the plan, documents, and evidence you filed and make their recommendation to the court. The judge will then decide whether your plan is approved.
Realize that the trustee’s feedback weighs heavily with the judge. Therefore, you want to provide as much evidence as possible to the trustee regarding your financial situation and justify any repayment proposals you make.
The Basic Elements of a Repayment Plan Under Chapter 12
Your Chapter 12 repayment plan will consist of several components:
- Requirements for Your Repayment – During the repayment period, you must turn over any disposable income you earn to the trustee. This includes bonuses and other revenue after you have paid business expenses and any maintenance expenses.
- Best Interests of the Creditors – In most cases, debts owed in a Chapter 12 case will be paid for pennies on the dollar to creditors – but only if the debt itself passes the best interests test. The goal is to ensure creditors are paid at least what they would have received in a Chapter 7 liquidation.
- Collateral – Any balance that is owed more than an assets collateral value is unsecured debt, which is paid little to nothing in Chapter 12. Also, any secured debts that you do have may be stretched past your repayment plan, and you could get an interest rate reduction.
Bottom Line: Meet with a Bankruptcy Attorney
If you earn a living farming or fishing, you might qualify for Chapter 12. Contact us today to meet with an attorney. We can review your financial situation and help pick the right bankruptcy option based on your current financial situation.