What is Chapter 12 Bankruptcy?

When a person or a business incurs debts that are beyond the possibility of repayment, it is common to seek bankruptcy protection to avoid having assets seized by creditors. Bankruptcy often comes as a result of tough economic times, whether on a general or personal basis. Various types of bankruptcy protection are provided for by United States law. Chapter 12 bankruptcy is designed specifically to meet the needs of family farmers and fishermen, and because of this, it is less well-known than other types of bankruptcy protection.

For the purposes of chapter 12 bankruptcy, a family farmer is defined by several tests. First, the farmer’s debts may not exceed $1.5 million U.S. Dollars (USD), and at least 80% of this debt must be related to farming. Debt owed on a home is not computed as part of this total unless it is directly connected to the farming operation. The law also requires that a farmer who files for chapter 12 bankruptcy must have earned at least half of his gross income from farming in the year preceding the filing. In addition, the farmer must make a sufficient income to be able to make payments under a chapter 12 plan, before the bankruptcy petition is granted.

Chapter 12 bankruptcy was created in 1986, with the goal of removing some of the obstacles that normally faced farmers and fishermen. To reorganize under chapter 11 or chapter 13 of the bankruptcy code was often very complicated or expensive, or simply provided too little benefit. When chapter 12 of the bankruptcy code was enacted by the U.S. Congress, it was thought of as a temporary measure that may not be needed indefinitely. When enacted, the law forbade chapter 12 bankruptcy filings after 30 September 1993. However, the law was changed to allow chapter 12 filings long after the initial time limit.

Chapter 12 bankruptcy is modeled closely after chapter 13, but with a higher debt ceiling than chapter 13 provides. This made it much more beneficial to farmers and fishermen, who must incur higher debts than normal wage earners in the normal course of business. Under chapter 12, debtors propose a debt repayment plan to repay all or part of their debts within a period of three to five years. A period of three years is usually as long as debtors are allowed to pay back their debts, but extenuating circumstances can persuade a court to approve up to a five year period.