What is Chapter 12 bankruptcy?
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Chapter 12 of the Bankruptcy Code is entitled “Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income.” Chapter 12 is designed to help financially distressed family farmers or fishermen who have a regular source of income to repay their debts and remain in operation.
Chapter 12 eliminates many of the barriers these debtors would face if they tried to reorganize under Chapter 11 or 13 of the Bankruptcy Code. It is more streamlined, less complicated and less expensive than Chapter 11, and better suited for family farmers and fishermen who generally have larger debts than individuals who file under Chapter 13.
A family farmer or fisherman is defined as an individual, individual and spouse, corporation, or partnership engaged in a farming or fishing operation. To be eligible to file under Chapter 12, the family farmer or fisherman must meet certain debt and income criteria.
Chapter 12 Eligibility
For an individual, or an individual and spouse to be eligible, the total debts of the operation must not exceed $4,153,150 for a farming operation, and $1,924,550 for a commercial fishing operation (the dollar amounts are adjusted every three years for inflation). In addition, for a family farmer, at least 50% of the total fixed debts, not including the debtor’s home, must be related to the farming operation; and more than 50% of the gross income for the prior three tax years must have come from the farming operation. For a family fisherman, 80% of the total fixed debts must be related to the commercial fishing operation, and more than 50% of the gross income for the prior tax year must have come from the commercial fishing operation.
For a corporation or partnership to be eligible, 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, who must also conduct the farming or commercial fishing operation. If the corporation issues stock, the stock cannot be publicly traded. The debt limits for a corporation or partnership are the same as for an individual debtor.
The Chapter 12 Filing Process
The Chapter 12 case begins when the debtor files a petition with the bankruptcy court along with a statement of financial affairs, the required schedules, and the applicable filing fee. The following information is necessary in order to complete the bankruptcy documents: (1) a list of creditors and the nature and amounts of their claims; (2) the source, amount and frequency of the debtor’s income; (3) a list of the debtor’s property; (4) a list of the debtor’s monthly farming and living expenses.
The Automatic Stay
Filing the Chapter 12 petition stops most creditors from trying to collect on debts pursuant to the automatic stay provision. The stay is called “automatic” because it does not require a court order. While the stay is in effect, creditors cannot sue the debtor, must discontinue existing lawsuits, cancel wage garnishments, and otherwise stop all types of collection activity against the debtor.
Meeting of Creditors
After the petition and supporting documents are filed, a case trustee is appointed. The case trustee will schedule a meeting of creditors. The debtor is required to attend the meeting. After being sworn in, the debtor must answer any questions posed by the trustee or creditors pertaining to the debtor’s finances, and will also be required to set forth the terms of the debtor’s proposed repayment plan.
Hearing on the Repayment Plan
Following the meeting of creditors, a hearing on the debtor’s repayment plan will be scheduled at which time the debtor, case trustee, and any interested creditors will appear in court. At the hearing, the repayment plan will be submitted for court approval, also known as confirmation. The bankruptcy judge must review the proposed plan and decide if it is feasible and meets the standards set forth in the Bankruptcy Code. Creditors must file any objections that they have to the plan within a certain period of time following the confirmation hearing.
The most common objection made is that the creditors would receive more money if the debtor’s Chapter 12 case were converted to a Chapter 7 case, whereby the debtor’s assets would be sold and the proceeds distributed to the creditors.
After the Claim Is Approved
If the court confirms the debtor’s plan, payments are made to the case trustee who distributes those payments to the creditors. Once the plan is confirmed, the plan is binding on the debtors and creditors. The debtor must make the required payments or risk having the plan converted to a Chapter 7 liquidation. After all of the payments under the confirmed plan are made, the Chapter 12 debtor is entitled to a discharge. The discharge releases the debtor from all debts that were set forth in the repayment plan, however, certain debts cannot be discharged, including but not limited to alimony and child support.