Bankruptcy : Chapter 12

Chapter 12 is designed for "family farmers" or "family fishermen" with "regular annual income." It enables financially distressed family farmers and fishermen to propose and carry out a plan to repay all or part of their debts. The purpose of the "regular annual income" requirement is to ensure that the debtor's annual income is sufficiently stable and regular to permit the debtor to make payments under a chapter 12 plan. But chapter 12 makes allowance for situations in which family farmers or fishermen have income that is seasonal in nature.

Relief under chapter 12 is voluntary, and only the debtor may file a petition under the chapter.

In tailoring bankruptcy law to meet the economic realities of family farming and the family fisherman, chapter 12 eliminates many of the barriers such debtors would face if seeking to reorganize under either chapter 11 or 13 of the Bankruptcy Code. For example, chapter 12 is more streamlined, less complicated, and less expensive than chapter 11, which is better suited to large corporate reorganizations. In addition, few family farmers or fishermen find chapter 13 to be advantageous because it is designed for wage earners who have smaller debts than those facing family farmers.

Eligibility

Those eligible to file under bankruptcy chapter 12 as "family farmers" must fall into two categories:

(1)an individual or individual and spouse and
(2) a corporation or partnership.

Those falling into the first category must meet each of the following four criteria as of the date the petition is filed in order to qualify for relief under chapter 12.

1. The individual or husband and wife must be engaged in a farming operation
2. The total debts (secured and unsecured) of that farming operation must not exceed $1.5 million.
3. Not less than 80% of the total debts which are fixed in amount must be related to the farming operation.
4. More than 50% of the gross income of the individual or the husband and wife for the preceding tax year must have come from the farming operation.

In order for a corporation or partnership to fall within the second category of debtors eligible to file as "family farmers, the corporation or partnership must meet each of the following criteria as of the date of the filing of the petition.

1. More than one-half of the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives.
2. The family or the family and its relatives must conduct the farming operation.
3. More than 80% of the value of the corporation or partnership assets must be related to the farming operation.
4. The total indebtedness of the corporation or partnership must not exceed $1.5 million.
5. Not less than 80% of the corporation's or partnership's total debts which are fixed in amount must come from the farming operation owned or operated by the corporation or partnership.
6. If the corporation issues stock, the stock cannot be publicly traded.

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