When family farmers in the U.S. face tough economic conditions or other financial difficulties, they can utilize the Chapter 12 Bankruptcy option. Created in 1986, Chapter 12 Bankruptcy was created to help famers deal with difficult economic factors impacting their farm businesses, including:
Much like the Chapter 13 bankruptcy, which Chapter 12 is based off, this option provides advantages specifically for family farmers. The options include restructuring repayment to a seasonalrepayment scheduleover a three- to five-year period. This option also offers lower filing costs relative to other bankruptcy chapters. Through Chapter 12 bankruptcy, farmers can reorganize debt and avoid asset liquidation or foreclosure.
The Chapter 12 bankruptcy option is a much less common type of bankruptcy filing than other chapters. There were 498 Chapter 12 bankruptcy filings in 2018, compared to almost 766,000 Chapter 13 and Chapter 7 filings. Since Chapter 13 and Chapter 7 options normally apply to consumers, this makes sense. In the last ten years, more than 10 million total filings occurred in Chapter 7 and Chapter 13, compared to 5,039 Chapter 12 filings. During this time period, Chapter 12 bankruptcy filings have represented less than five-hundredths of a percent of total consumer and business bankruptcy filings.At 408, California has had the most Chapter 12 filings over the last ten years. Second in line was Georgia with 353 filings, and third Wisconsin at 341 filings. Regionally, Chapter 12 bankruptcies were the highest in the Midwest with 1,511 filings, with Southeast at close second with 1,484 filings.
The specific, unique benefits of Chapter 12 bankruptcy include:
With Chapter 12, farmers can take advantage of much more flexibility than would be the case under Chapter 7 or Chapter 11 bankruptcy options. Because farmers have fluctuating income, and are greatly affected by environmental factors, it makes sense that they receive concessions not offered under any other chapter of bankruptcy. Between these factors, and the fact that farmers can sell farmland and farm equipment free and clear of liens,farmers have more options to pay down their debts than other American business owners.
Lenders that work with farmers do a lot to try to help farmers avoid filing for Chapter 12, as they consider Chapter 12 the last resort option for farmers in debt. Lendersmake every attempt to work with farmer debtors to find cost efficiencies, improve marketing and enhance the use of risk management toolsin an effort to stabilize their business to a point where their debt becomes manageable. When all of those efforts are exhausted, farmers must meet the following qualifications to file for Chapter 12 bankruptcy:
These parameters help ensure that other types of businesses do not take advantage of Chapter 12, and that it is truly utilized by farmers and fishermen and adheres to certain debt limits.
Because Chapter 12 is a less expensive option than other bankruptcies, and one that gives creditors very little power, filing for Chapter 12 may be an easier decision than Chapter 7 or 13. Most Chapter 12’s run three to five years, so it would be important for a debtor to assess if they could catch up with their financial obligations in the same amount of time, or in less time. If they have a way to restructure their debt payments themselves and catch up, they may elect to make an independent attempt to catch up prior to filing. During a Chapter 12 process, an independent trustee is used, so the debtor has less control, which can be hard for business owners.
Because farming and fishing businesses face different challenges and deliver a vital set of commodities to the US economy, the law makes allowances for these businesses that address their specific challenges with repaying debt. The Chapter 12 bankruptcy option is not only more favorable than Chapters 7 and 13, it has gotten more advantageous in recent years, and continues to evolve. It is vital for farmers and commercial fishermen to stay informed of how Chapter 12 bankruptcy works. With this filing option, farm and fishing businesses can work their way out of debt in a fairly short amount of time, with lower filing fees than other bankruptcy options.