Chapter 12 Bankruptcy

What Is Chapter 12 Bankruptcy?

Chapter 12 bankruptcy was created to help family-run farms or fishing businesses that are facing debt. If you are a family farmer or fisherman who relies on this work for your regular annual income, you can apply.

You can only reorganize business-related debt through Chapter 12. It does not include or dismiss debt from owning a home. To learn more about Chapter 12 bankruptcy, please select one of the links below:

• The Basics of Chapter 12
  
• Chapter 12 vs. Chapter 11 and Chapter 13
• Eligibility for Chapter 12
• Bankruptcy Process: Filing a Chapter 12 Petition
• Chapter 12 Filing Fees and Administrative Fees
• Required Information to Submit When Filing Chapter 12
• Appointment of Bankruptcy Trustee
• The Automatic Stay
• Meeting of Creditors in Chapter 12 Bankruptcy
• Creating a Repayment Plan
• The Confirmation Hearing
• Making the Repayment Plan Work
• Final Chapter 12 Discharge

Basics of Chapter 12

Filing for Chapter 12 bankruptcy requires farmers and fishermen to create a plan to repay debt. This is proposed to the courts and then you must carry out the plan. It will repay all or some of the debts over the next three to five years.

Choosing to seek debt relief under Chapter 12 is always voluntary. Your creditors can't force you to file for it. Only the business owner who has the debts in their name can file a petition under Chapter 12.

Chapter 12 Compared to Chapter 11 and Chapter 13

Chapter 12 of the U.S. Bankruptcy Code tailors bankruptcy law for the financial reality of family farms and fishing businesses. It streamlines the process these people would normally face in Chapter 11 or Chapter 13 of the Bankruptcy Code.

Chapter 12 is generally:

• A faster and smoother process
• Less complicated
• Less expensive than filing for Chapter 11
• Easier for small family-owned businesses (Chapter 11 is usually better for large corporations)
• Focused on larger debts than the small debts allowed in Chapter 13

You should carefully consider which Chapter is right for you. Chapter 12 is the right fit in many cases because it was created specifically for fishing and farming family-run businesses.

Eligibility for Chapter 12

Only farmers and fishermen can use Chapter 12 to manage their debt.

Under the Bankruptcy Code, "family farmers" and "family fishermen" fall into two categories:

1. A person or a married couple
2. A corporation or legal business partnership

Eligibility for Individuals and Married Couples

Only one person or married couple can file for Chapter 12 (you and a business partner cannot file together). Other eligibility requirements include:

• You or your relatives must actively engage in farming or commercial fishing
• Total debts must be $4,153,150 or less for farmers
• Total debts must be $1,924,550 or less for commercial fishermen
• 50% or more of your total income must have come from farming or fishing in the previous year

Eligibility for Businesses

A corporation or partnership may be eligible to file for Chapter 12 bankruptcy if it is closely held by a family and does not have publicly traded stock. Other requirements include:

1. One family (or a group of relatives) needs to own more than half the stock or equity
2. One family (or a group of relatives) must be the workers or on the staff at the farming or fishing operation. They can't own from afar and have it managed or worked by others.
3. 80% of more of the company's value must be in assets related to farming or fishing. Examples are boats, equipment, buildings, etc.
4. Total debt is capped at $4,153,150 for a farm and $1,924,550 for a commercial fishery or fishing business (as of 2020). This debt amount does not include debt from owning a home.
5. At least 50% of the total business debt must be for the farming business ($2,076,575 as of 2020)
6. At least 80% of the business debt must be for the fishing business ($1,539,640 as of 2020)
7. Stocks can't be publicly traded

"Regular Annual Income"

To qualify for Chapter 12, you must receive regular annual income from your family-owned or family-run fishing or farming operation (this can be seasonal).

The income requirement is necessary to ensure your yearly income is stable. This helps during the reorganization and repayment phase because you can accurately predict what you can make in a year. This allows you to make each payment.

Other Eligibility Considerations

You can't file for any bankruptcy chapter if:

• You failed to appear in court for bankruptcy in the last 180 days. This results in your bankruptcy being dismissed. This does not apply to legal reasons or accidents that led to you missing the court date.
• You failed to follow all court orders in the last 180 days. This will also dismiss your bankruptcy case.
• Your creditors asked the bankruptcy court for your property because they hold liens on it. Bankruptcy cases can be voluntarily dismissed at this point if the debt no longer exists.
• You failed to get court-ordered credit counseling in the past 180 days.

There are some exceptions to these situations, and the rules can be confusing. Discuss specific situations with your U.S. trustee, bankruptcy administrator, or attorney.

Bankruptcy Process: Filing a Chapter 12 Petition

This type of bankruptcy case starts with gathering documents and filling out paperwork. This becomes your petition that must be filed with your local court.

Your court serves the area where your family or relatives live or where the farm or fishing operation is. Spouses can file together with a joint petition or file individual petitions.

Chapter 12 Filing Fees and Administrative Fees

You can expect to pay the court clerk these fees:

• $200 filing fee
• $75 "miscellaneous" administrative fee

If you cannot pay the $275 when you file, you can ask the courts for permission to pay in four payments. You must make all the payments within 120 days after filing for bankruptcy.

In special circumstances (disability, job loss, death, etc.), you can ask for a payment extension to 180 days instead of 120. If you and your spouse file together with a joint petition, you only have to pay the $275 fee once.

If you do not pay these filing fees, your case will be dismissed by the courts.

Required Information to Submit When Filing Chapter 12

You will need to submit all forms and information about:

1. Your business's creditors or lenders
2. The amount of each creditor's claim and what was purchased with the money
3. Your total annual income and the frequency of your income (for seasonal operations)
4. Your assets and property
5. Your expenses per month (i.e., utilities for buildings, taxes, transportation of workers or products, medicine and food for fish or animals, fertilizer, etc.)

Even if you file together, each spouse needs to provide this information. If just one spouse files for bankruptcy, the other spouse needs to show their income and expenses so the courts can understand your household's entire financial picture.

Appointment of Bankruptcy Trustee

Your case will have an impartial trustee assigned, called a bankruptcy trustee. This person will oversee the case, administer tasks and debt repayments, and be there to answer your questions. They will evaluate your case and decide whether it is approved or not.

While this person may be helpful, they represent the bankruptcy case's interests and not yours. Hiring a bankruptcy attorney is the only way to make sure your interests are upheld.

The Automatic Stay

When you file the Chapter 12 petition you will get an automatic stay. This will stop most collection agencies and debt collectors from taking action against you. These creditors and agencies generally can't:

• Sue you (and current lawsuits must stop)
• Take your salary through wage garnishments
• Make calls to your or your family asking for information or payments

The bankruptcy court will automatically give notice of the case to all your creditors. During the process, you will provide their names and addresses. Make sure to include them all so they will stop calling you!

Protecting Co-Debtors With an Automatic Stay

The automatic stay will also protect your co-debtors. Creditors can no longer call them and hold them responsible for the debt they signed on to unless the court authorizes them to. This protects:

• Co-debtors who signed paperwork with you
• Any person liable for the debt

Meeting of Creditors in Chapter 12 Bankruptcy

Your bankruptcy trustee will hold a "meeting of creditors" between 21 to 35 days after you file the petition and it is approved.

Some areas do not have trustees or administrators on staff. In situations like this, the meeting can take up to 60 days to take place.

During the meeting, you can expect to:

• Take an oath to tell the truth
• Answer questions from your trustee or creditors (often creditors do not show up to these meetings)
• Attend the meeting (both spouses must attend if you filed together)
• Answer questions honestly about your finances
• Have a debt repayment plan and discuss the timeline and terms

There will not be a bankruptcy judge at this meeting. Instead, the parties (you, the creditors, and the trustee) will work to resolve the debt issues and approve the plan. Things are typically resolved at this meeting or soon afterward.

It is a good idea to consult with your attorney and trustee before this meeting takes place. This avoids common problems and disagreements — and helps ensure your plan is legal, accurate, and complete.

Creditors File Claims Against You Within 90 Days

Your creditors have 90 days to file claims against you. The clock starts after the creditor's meeting takes place and only applies to unsecured creditors.

If you have debt from a government business or agency, they have 180 days to file a debt claim against you.

If either party misses their deadlines, they cannot make claims against you and will not be repaid during your repayment plan phase.

Repayment Plans

Repayment Plan Hearing

There will be a hearing that you, your Chapter 12 trustee, and any interested creditors must attend. This meeting will provide confirmation for your repayment plan.

Creating a Repayment Plan

You must file your plan of repayment when you file the bankruptcy petition or within 90 days. In some cases, you can ask the courts for an extension. The courts will approve or deny this plan.

Make sure the plan shows:

• You will pay all debt back in full within three years or you will pay within five years if you have an extreme circumstance (permanent disability, death of a spouse, etc.).
• 100% payment of all domestic support claims (i.e., child support and alimony). The courts will not accept not paying your court orders or child support debts.
• A regular schedule of payments
• A fixed amount for each monthly payment
• Agreement to send the payment to the trustee

Your bankruptcy trustee will take over and you will make payments to them. They will distribute the payments to each creditor. These repayment plans typically negotiate the debt amount down and give creditors less money than you actually owe. Still, for creditors, it is better than not getting paid at all.

Creditors' Claims and Repayment Under the Plan

There are three types of debt claims that you must plan for. These include:

• Priority claims such as taxes and the fees you pay at the start of the bankruptcy case
• Secured claims are for property you have not paid off. Your creditors can take this property back (called liquidation) if you do not pay what you owe. Some values depreciate over time, so you must pay the current value. For example, if you bought a car for $10,000 but it has depreciated to $5,000, you must pay the secured creditor $5,000. In a situation like this, the secured creditor might be the car dealership or the bank where you secured a car loan.
• Unsecured claims are for most other debts. A creditor has no right to take assets from you and it is not a priority to pay off. See other rules about unsecured claims below.

You will pay for all these types of claims unless the creditor agrees to drop the debt or you are facing a hardship and cannot afford it.

"Unsecured" Claims Under the Plan

You will likely not have to pay for all of the unsecured claims. These creditors are looking for you to:

• Commit as much "disposable income" (or property of equal value) as possible to your plan payments. This shows you are seriously trying to pay off your debts.
• Commit to paying back as much as possible over three years (five years if you have special permission from the court)
• Pay the creditors at least as much as they would receive if you had filed for Chapter 7 (which automatically liquidates your assets and sells them for money)

So what is "disposable income" to the courts? It is any income that is not "reasonably necessary" for:

• Day-to-day living and support of you and your family (utilities, mortgage, food, transportation, etc.)
• Costs needed to operate your business day-to-day

The Confirmation Hearing

A confirmation hearing happens within 45 days of the plan being approved by you, the trustee, and your creditors.

You do not need to attend this meeting because your plan has already been approved by all parties. Now, the judge simply decides if the plan is fair, honest, and follows the Bankruptcy Code. Your attorney and bankruptcy trustee will already have helped you ensure the plan is legal and acceptable to all parties.

Your creditors can attend and object to your plan (they will receive 21 days' notice of the date of this hearing). They could argue that:

• You are not offering enough money in the monthly payments. They might ask that your assets are sold off instead so they can take the money.
• You are not giving them enough disposable income and you could afford to pay more

If the judge approves your plan, you will start making the monthly payments to your trustee. They will handle getting the money to each of your creditors according to the terms you created.

Denying the Plan at a Confirmation Hearing

If the court and its bankruptcy judge don't confirm your plan, you will need to make changes and file a new plan. If changes cannot be made or you cannot afford them, you can change your filing to Chapter 7 instead.

If you change your mind, change the plan, or don't make the payments, then the case can be dismissed. This is not ideal because the trustee is often able to keep some of the fees you paid. Sometimes situations change and you can't afford the payments you were making. Creditors will protest this, so you can be proactive and talk to your trustee.

The plan can be modified anytime before or after this confirmation hearing. You, the trustee, or your creditors can request changes (such as asking for more or less money per payment). Unless you work with the courts to officially change the plan, you can't just change payments or stop paying the trustee.

Making the Repayment Plan Work

While paying off debt during the repayment phase, you should consider:

• Taking proactive steps if creditors ask for changes or your circumstances change (like a job loss or promotion)
• Make a budget and cut spending as much as possible
• Do not take on large new debts (such as a home or car loan) unless necessary. Your trustee may need to be consulted for any new debt.
• Do not try to hide new debt or lifestyle changes. In some cases, hiding information can qualify as fraud.

While this process can feel annoying and controlling, your trustee is there to help you get through the years of repayment and avoid new debt. They serve the courts, however, so your bankruptcy attorney is your main ally throughout this process.

Final Chapter 12 Discharge

At the end of the three or five years and repayment plan, you are free from all debts listed in the bankruptcy — aside from taxes, student loans, child support, and alimony debts.

Any creditors that were part of the case must leave you alone and not bring new claims.

Creditors you repaid (or partly repaid) can't sue you or try to collect any debts from you after this point.

Talk to an Attorney to Learn About Chapter 12

Depending on your unique situation and your financial goals, bankruptcy just might be the best option for you. But making the right decision as soon as possible can make all the difference.

It's a good idea to talk to a local bankruptcy attorney if you have questions about bankruptcy or would like some guidance through the bankruptcy process.

Related Resources:

• See Chapter 12 of the U.S. Bankruptcy Code here
• Chapter 11 Business Bankruptcy
• Chapter 7 for Business Liquidation