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Chapter 12 Bankruptcy – Family Farmers

Overview

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:

  • Low Farm Income Low Farm Income
  • Low Commodity Prices Low Commodity Prices
  • Excessive Farm Debt Excessive Farm Debt
  • Constraints of the Agricultural Credit Markets Constraints of the Agricultural Credit Markets
Chapter 12 Bankruptcy – Family Farmers

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:

  • Cramdowns are allowed. A cramdown allows a debtor to pay the present market value of a property rather than the whole debt owed during a Chapter 12 bankruptcy process. This applies to almost all secured debt.
  • Farmers filing Chapter 12 can propose a repayment plan to make installments to creditors over three to five years, andas long asthe plan meets the requirements set forth in chapter 12, it is usually allowed. Unlike other bankruptcy options, creditors do not need to approve the plan, and they do not have the opportunity to vote against it.
  • With Chapter 12, there is no requirement for equal monthly payments. This allows farmers to make seasonal or balloon payments that may work better with the particulars of their commodities.
  • Debtors can still use, sell or lease property of the estate in the normal course of business without court approval during Chapter 12.
  • If a farmer sells farm assets during Chapter 12 filing and process, the tax claims from those sales can be treated as unsecured claims and they may not have to be paid in full or at all.
  • If the farmer is unable to complete the repayment plan because of illness or natural disasters, he or shecould qualify for a hardship discharge.A hardship discharge could free the debtor of remaining loan obligations completely.

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.

Qualifying for Chapter 12

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:

  • The filing party must be engaged in either a farming operation or a commercial fishing operation.
  • More than 50 percent of the debtor’s gross incomefor the previous tax year must have come from farming or commercial fishing.
  • Family farmers may have to meet additional gross income criteria on prior tax years relative to the gross income from farming.
  • Total debts cannot exceed $4,153,150 for farmers.
  • Total debt must not exceed $1,924,550 in inflation-adjusted dollars for family fishermen.
  • A minimum of 50 percent of the total debts that are fixed in amountmust be related to the farming operation and 80 percent for a commercial fishing operation. This excludes the mortgage debt for the debtor’s home.

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.

How to Decide Whether to File for Chapter 12

Chapter 12 Bankruptcy – Family Farmers

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.

Conclusion

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.

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