What Is Chapter 12 Bankruptcy?

Definition & Examples of Chapter 12 Bankruptcy

Man and woman looking at vegetables they've picked off their farm
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Chapter 12 bankruptcy provides a way for family farmers or family fishermen under financial distress to pay back their debts. If approved, it prevents creditors and collectors from taking action against the debtor while they pay back their debts.

Because of the seasonal nature of farming and fishing operations, Chapter 12 offers more flexible payment arrangements than a standard Chapter 13 arrangement. Learn more about what Chapter 12 bankruptcy is, who qualifies, and how it works.

What Is Chapter 12 Bankruptcy?

Designed as a response to difficulties suffered by farmers and fishermen in the 1980s, Chapter 12 bankruptcy shares some aspects of Chapter 11 and Chapter 13 bankruptcies but is structured to work better for the unique needs of farmers and fishermen.

When approved for Chapter 12, a family farmer or fisherman gains protection from creditors and collectors and is allowed to reorganize debts into a three- or five-year payment plan.

There are two types of farming operations that can qualify for Chapter 12 bankruptcy.

Individual or Individual and Spouse

An individual or married couple with a farming or commercial fishing operation and regular annual income may file for Chapter 12. Additionally, they must have:

  • Total debts that do not exceed $4,153,150 for a farmer and $1,924,550 for a fisherman
  • For a family farmer, at least 50% of their debts from the farming operation
  • For a family fisherman, at least 80% of the debts from the fishing operation
  • More than 50% of their gross income from the farming or fishing operation for the prior tax year

Corporation or Partnership

A corporation or partnership may also qualify as a family farmer or fisherman under certain circumstances:

  • More than half of the stock must be owned by one family and its relatives, and they must actively conduct business operations.
  • More than 80% of the company's value must be tied to its farming or fishing operations.
  • Total debt limits and percentages are the same as for individual farmers and fishermen.
  • The corporation does not issue publicly traded stock.

Regardless of whether the filer is an individual, corporation, or partnership, they must not have willfully failed to appear in court, comply with court orders, or have been voluntarily dismissed after creditors sought payment via bankruptcy court within the last 180 days. They also must have received credit counseling from an approved agency within 180 days before filing.

How Chapter 12 Bankruptcy Works

Similar to other bankruptcy chapters, a person that wishes to file for Chapter 12 must gather all of their financial information and submit the voluntary petition, the schedules, the statement of financial affairs, a complete list of debts and creditors, and any other documents the court requests. These documents and any required fees must be filed with the clerk of the bankruptcy court in the area where the person lives or conducts their business.

Automatic Stay

When a farmer or fisherman files for Chapter 12 bankruptcy, an automatic stay goes into effect, like all other bankruptcy cases. This prohibits creditors from taking certain collection actions without the permission of the bankruptcy court. In addition to protecting the debtor, the automatic stay in a Chapter 12 case also protects anyone who is also liable on any of the Chapter 12 debtor's consumer debts (those debts incurred for personal, family, or household purposes rather than business debts associated with the farming or fishing operation). 

If John has a credit card on which his brother is also liable, under Chapter 12, his brother would also be protected by the automatic stay even though John's brother did not file bankruptcy himself. This is often called the co-debtor stay. 

Trustee and Creditors

As in other bankruptcy cases, the court will appoint a trustee to work with the debtor and their creditors. At the outset, a Chapter 12 trustee will hold a meeting of creditors. During the meeting, the trustee and creditors may ask you questions about your petition and financial affairs. This information will be used in setting up your payment plan.

Chapter 12 Plan

Similar to a Chapter 13 case, the debtor must propose a Chapter 12 plan that pays off their debts over a period of three to five years. These can include secured and unsecured debts. The plan must pay creditors within the requirements of the bankruptcy laws. At a minimum, this means that secured creditors must be paid the value of their collateral and unsecured creditors must receive as much as they would have under a Chapter 7 liquidation.

A bankruptcy judge must also confirm the plan. After a confirmation hearing, the Chapter 12 debtor must make regular payments to the trustee, who will then make payments to creditors.

A farmer or fisherman filing for Chapter 12 must submit their payment plan within 90 days of filing their petition for bankruptcy.

Discharge

The Chapter 12 debtor does not receive a discharge until all of their plan payments have been made. However, there is an exception called the "hardship discharge," which permits a discharge despite having not made all plan payments. This is permitted if the debtor can prove that they failed to make all plan payments due to no fault of their own and the cause was not within their control. An example may be a severe illness. Creditors also must have received at least as much as they would have under Chapter 7 liquidation.

Key Takeaways

  • Chapter 12 bankruptcy allows family farmers and fishermen in financial distress to discharge their debts over three to five years.
  • It combines aspects of Chapter 11 and Chapter 13 bankruptcies while allowing a more flexible payment plan due to the seasonal nature of these businesses.
  • As long as they stick with the payment plan, debtors do not have to liquidate assets under Chapter 12.
  • Creditors and collectors may not take action against Chapter 12 debtors without permission of the court.

Article Sources

  1. Farm Bureau. "What is Chapter 12 Family Farmer Bankruptcy?" Accessed July 31, 2020.

  2. United States Courts. "Chapter 12 - Bankruptcy Basics." Accessed July 31, 2020.