Chapter 12 Bankruptcy

Severe weather events have had a significant effect on the farming and fishing industries. Low commodity prices have increased agricultural debts. Many family-run businesses are struggling and may face insolvency. Modeled after Chapter 13 bankruptcy, Chapter 12 bankruptcy addresses the unique circumstances faced by family-run farms or fishing businesses when in debt. 

You can apply if you are a family farmer or fisherman relying on this work for your annual income. Chapter 12 bankruptcy relief allows you to reorganize only business-related debt. It does not include or dismiss debt from owning a home.

Basics of Chapter 12

Filing for Chapter 12 bankruptcy, sometimes called farm bankruptcy, requires farmers and fishermen to create a plan to repay debt. If the courts approve, you must carry out the plan. It will repay all or some of the debts over three to five years.

Choosing to seek debt relief under Chapter 12 is always voluntary. Your creditors can’t force you to file. Only the business owner with 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 face in Chapter 11 or Chapter 13 of the Bankruptcy Code.

In general, Chapter 12 is:

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

You should consider which bankruptcy chapter is right for you. For fishing and farming family-run businesses, Chapter 12 is often the right fit because Congress created it with those vocations in mind.

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

If you’re not one of these, you may not be eligible for Chapter 12.

Eligibility for Individuals and Married Couples

Only one person or a 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 $11,097,350 or less for farmers
• Total debts must be $2,268,550 or less for commercial fishermen
• 50% or more of your total income must have come from farming or 80% or more from fishing in the previous year

These conditions must be met to be eligible.

Eligibility for Corporations or Partnerships

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

• One family or a group of relatives must own more than half the stock or equity
• One family or a group of relatives must work at the farming or fishing operation or be on the staff. They can’t own it afar and have it managed or worked by others.
• 80% or more of the company’s value must be in assets related to farming or fishing. Examples are boats, equipment, or buildings
• As of 2024, a farm’s secured and unsecured debt limit is $11,097,350, while the limit is $2,268,550 for a commercial fishing operation or fishing business. This liability cap does not include debt from owning a home.
• At least 50% of the total business debt must be for the farming business
• At least 80% of the business debt must be for the fishing business
• Stocks can’t be publicly traded

If you’re uncertain or are feeling overwhelmed trying to figure things out, consider speaking with a bankruptcy attorney for legal advice.

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. At least 50% of your gross income must be from the family business. This may be an average of the prior two or three tax years for farmers. The income can be seasonal.

The income requirement is necessary to ensure your yearly income is stable. It helps during the reorganization and repayment phase because you can predict with accuracy 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. The court will dismiss your bankruptcy application. 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. If the debt no longer exists, bankruptcy cases can be voluntarily dismissed at this point.
• 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. The paperwork becomes your petition, which you file with your local court.

Your bankruptcy 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 make four payments. You must make all the payments within 120 days of filing bankruptcy.

In exceptional circumstances, you can request a payment extension of 180 days instead of 120. If you and your spouse file a joint petition, you must only pay the $275 fee once.

The courts will dismiss your case if you do not pay these filing fees.

Required Information When Filing Chapter 12

The Chapter 12 debtor will submit a detailed accounting of your financial affairs. You will need to submit all forms and information about:

• Your business’s business’s creditors and lenders
• The amount of each creditor’s claim and purchases made with the money
• Your total annual income and the frequency of your income for seasonal operations
• Your assets and property
• Your monthly expenditures, including living expenses, utilities for buildings, taxes, transportation of workers or products, medicine and food for fish or animals, fertilizer

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

Appointment of Bankruptcy Trustee

Your case will have an impartial bankruptcy trustee assigned to your bankruptcy proceedings. The trustee will oversee the case, administer tasks and debt repayments, and be there to answer your questions. The Trustee will evaluate your case and decide whether to approve it or not.

While the appointed Trustee may be helpful, they represent the bankruptcy case’s interests, not yours. Hiring a bankruptcy attorney is the preferred way to uphold your interests.

The Automatic Stay

You will get an automatic stay when you file the Chapter 12 petition. The stay will stop most collection agencies and debt collectors from taking immediate action against you for consumer debt. These creditors and agencies can’t:

• Initiate a lawsuit against you
• Continue a current lawsuit or lawsuits and foreclosure actions must stop
• Take your salary through wage garnishments
• Make calls to your or your family asking for information or payments

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

Protecting Co-Debtors With an Automatic Stay

The automatic stay will also protect co-debtors. Creditors can no longer call and hold them responsible for the debt without court approval. This protects:

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

This protection is contingent on you meeting your new requirements.

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 the court approves it. Some areas do not have trustees or administrators on staff. In these situations, the meeting can take up to 60 days to hold. Before this meeting, you must collect bank statements, tax returns, business accounting, and other financial documents to provide to the trustee.

During the meeting, you can expect to:

• Take an oath to tell the truth
• Answer questions from your trustee or creditors, though often creditors do not attend these meetings
• Both spouses must attend if you file 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 will work to resolve the debt issues and approve the plan. Things are typically resolved at this meeting or soon after it.

It is a good idea to consult with your attorney and trustee before this meeting. This avoids common problems and disagreements. An attorney can help 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 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

There will be a hearing that you, your Chapter 12 trustee, and any interested creditors must attend. This meeting will confirm 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 the following:

• You will pay all debt back in full within three years, or you will pay within five years if you have an extreme circumstance, such as permanent disability or death of a spouse
• 100% payment of all domestic support claims, child support, and alimony. The courts will not accept nonpayment of 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 submit payments to them. They will distribute the payments to each creditor. These repayment plans often negotiate the debt amount down and give creditors less money than you owe them. It’s better for creditors than not getting paid at all.

Repayment of Creditors 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 or secured debt are for property you have not paid off. These debts are secured by an interest in the property, called collateral. If you do not pay what you owe, creditors can reclaim the property. Some values depreciate over time, so you must pay the current value of the collateral. This allowance to pay the depreciated value is a “cram down" of the debt. 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. Paying them off is not a priority. See other rules about unsecured claims below.

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

Unsecured Claims Under the Plan

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

• Commit as much disposable income or property of equal value to your plan payments as possible. This shows that you are serious about 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 liquidation bankruptcy, which sells off your assets to repay your debt

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, like utilities, mortgage, food, transportation
• Costs needed to operate your business day-to-day

Money to renovate your functional kitchen would be considered disposable income.

The Confirmation Hearing

A confirmation hearing occurs within 45 days of you, the trustee, and your creditors approving the plan.

You do not need to attend this meeting because all parties have already approved your plan. The judge decides if the plan is fair and 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 you sell your assets 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 give each of your creditors the money according to the terms you created.

Denying the Plan at a Confirmation Hearing

If the court and bankruptcy judge don’t confirm your plan, you must 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 bankruptcy.

The case could be dismissed if you change your mind, change the plan, or don’t make payments. This is not ideal because the trustee can often keep some of your fees. Sometimes situations change, and you can’t afford the payments you are making. Creditors will protest this. You can be proactive and talk to your trustee.

You can modify the plan prior to the confirmation hearing. You, the trustee, or your creditors can request changes, such as asking for more or less money per payment. However, unless you work with the courts to change the plan, you can’t 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 significant new debts, such as a home or car loan, unless necessary. Consult your trustee before taking on 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, so your bankruptcy attorney is your main ally throughout this process.

Final Chapter 12 Discharge

At the end of the three- to five-year repayment plan, you are free from all debts listed in the bankruptcy except taxes, student loans, child support, and alimony debts, which are not dischargeable.

Any creditors that were part of the case must leave you alone and not bring new claims. Creditors you repaid in full or in part can’t sue you or try to collect any debts from you after this point.

Talk to an Attorney About Chapter 12

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

If you have questions about bankruptcy or would like guidance through the process, talk to a local bankruptcy attorney.