An explanation as to how Chapter 12 works as well as its advantages and disadvantages for family farmers and fishermen.
What Are the Bankruptcy Options for Farmers and Fishermen?
If the goal is to reorganize and the farmer or fisherman is an individual, the options to consider would include Chapter 11, Chapter 12, and Chapter 13. If the debtor is a corporation, Chapter 13 would not be an option. In addition, Chapter 13 has lower debt limits then a Chapter 12. If the secured debt is more than approximately one million one hundred fifty thousand dollars and the unsecured debt is more than approximately three hundred eighty thousand dollars then a Chapter 13 would not be an option. For family farmers and fishermen in Chapter 12 the debt limit is four million dollars.
What are the Requirements of Chapter 12?
In order to file a Chapter 12, at lease fifty (50) percent of the total debt must come from farming operations, or eighty (80) percent of the total debt must come from commercial fishing operations. In each of these cases the home mortgage does not count in the calculation. In addition, both the farmer and commercial fisherman must derive more than fifty (50) percent of their gross income from farming or commercial fishing operations. As stated above the debts cannot exceed approximately four million dollars for a famer or more than one million eight hundred thousand for a fisherman. The same rules would apply for partnerships or corporations as long as the partnership or corporation is owned at least fifty (50) percent by a single family.
What are the Advantages of Chapter 12?
Chapter 12 is similar to a Chapter 11 and a Chapter 13 in that it allows a debtor to reorganize its debts, often eliminating some debt and paying other debt out over time. Unlike a Chapter 11 bankruptcy where creditors vote on the plan, a Chapter 12, like a Chapter 13 bankruptcy, requires only court approval as long as the plan complies with the bankruptcy law. Creditors can object and assert their position but they do not vote. In addition, in a Chapter 12 a debtor can cram down debt on secured debts such as mortgages and propose payments over a lengthier period of time than the five (5) years allowed in a Chapter 13. As long as the creditors receive at least what they would have in a liquidation and the plan meets the best interest test, the balance of the debts can be discharged in the process.
How Does a Chapter 12 Work?
Like with other bankruptcies, a detailed petition, schedules, and statement of financial affairs are completed. The information contained in these documents reflects the debtor's income and expenses, and their assets and liabilities. There is a Chapter 12 Trustee appointed in the case. In addition, a Chapter 12 Plan would be filed proposing the payments. The Plan will be served on all creditors which will have the opportunity to object. Ultimately there will be a hearing on the proposed plan to determine whether it should be confirmed.
Are There Any Disadvantages to Filing a Chapter 12?
As with any bankruptcy, there will be a negative impact on the debtor's credit. Generally a workout with creditors should be considered before the actual filing of the bankruptcy. In addition, similar to a small business Chapter 11 bankruptcy, once the Chapter 12 plan is filed, there is a limited period of time to obtain court approval. For cause that time frame can be extended but it occasionally puts the Chapter 12 debtor in a difficult situation
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