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Chapter 12 bankruptcy: The basics

On Behalf of | Jun 17, 2020 | Bankruptcy

In 1986, Congress enacted Chapter 12 bankruptcy in response to the poor economic conditions of family farmers and family fishermen. The bankruptcy addresses the challenges these families face, such as the unpredictable cost of land, weather and commodity prices.

The U.S. Bankruptcy Court reported 595 Chapter 12 filings in 2019, a 20% increase from the previous year. In August of the same year, the president signed into law the Family Farmer Relief Act of 2019. The Act increased the debt limit to determine the eligibility of the family farmer for bankruptcy. Here are some basics of Chapter 12:

Who is eligible?

Under the Bankruptcy Code, “family farmers” and “family fishermen” are those who have regular income from farming and fishing. They fall under two categories:

  • An individual or individual and spouse
  • A corporation or partnership

The total combined debt of a family farmer cannot exceed $10 million. The bankruptcy court allows a total debt of $1.5 million for family fishermen.

How does it work?

Like other bankruptcies, the debtors must provide a petition, a statement of financial affairs and schedules. The documents need to include the following information:

  • A list of all creditors and amounts due
  • Debtor’s income
  • List of property
  • A detailed list of monthly farming or fishing and living expenses

After filing the petition, most collection actions may have an automatic stay. The stay lets the creditors know they cannot begin or continue lawsuits, wage garnishment or telephone calls regarding payments.

What is the result?

The trustee appointed by the court will have a creditor meeting. During this meeting, when under oath, the debtor must answer questions from the trustee and creditors. Under Chapter 12, debtors suggest a plan for paying off the creditors. The debtors pay the trustee who pays the creditors.

The proposed plan may last from three to five years unless the debtors can pay off the amount sooner. If the debtor owes back child support or alimony, the plan must be for five years.