The Evolution Of Chapter 12: A Historical Law Perspective

Chapter 12, a category of bankruptcy in the United States, became law in 1986. It was introduced as a temporary measure to help relieve financial pressures on family farmers and fishermen. The chapter offers a bankruptcy framework that allows them to reorganize their businesses while maintaining ownership. It was later made permanent in 2005.

Chapter 12 bankruptcy law

Who is eligible for Chapter 12 bankruptcy?

Chapter 12 bankruptcy is a form of debt relief for "family farmers" and "family fishermen" with "regular annual income". It allows them to continue operations while avoiding foreclosure or a business shutdown.

To be eligible, farmers and fishermen must meet several requirements, including limits on total debt. For instance, in the case of farmers, at least 50% of the debt must be related to their farming business. For fisheries, this figure is 80%.

More than 50% of the gross income of an individual or married couple must come from the business in the preceding tax year. In the case of farmers, this applies to each of the two or three prior tax years.

Chapter 12 bankruptcy is similar to Chapter 13 bankruptcy but is limited to a small sector of the population—family farmers and fishermen. It is also less complicated and expensive than Chapter 11 bankruptcy and accommodates larger debts than Chapter 13.

A Chapter 12 case begins with the case filing. The "automatic stay" order stops most creditors from pursuing debt collection. Soon after, the court appoints a bankruptcy trustee to review documents, monitor operations, and conduct a "meeting of creditors". The trustee also collects plan payments and disburses them to creditors.

The debtor must provide the trustee with bank statements, profit and loss statements, tax returns, and other financial documents. At the meeting, the trustee will verify the debtor's identity and ask questions about the bankruptcy filing. Creditors can also ask questions.

The debtor must file a proposed repayment plan within 90 days of filing for bankruptcy. The court can give up to five years to pay if the debtor can show "cause" or good reason. The court will then hold a confirmation hearing to approve the plan.

The debtor must then make regular, agreed-upon payments to the trustee, who will distribute the money among the creditors. This will typically go on for three to five years, after which any remaining debts will be discharged.

Who is eligible for Chapter 12?

Chapter 12 of Title 11 of the United States Code, or simply Chapter 12, is a chapter of the Bankruptcy Code that is applicable only to family farmers and fishermen. It was added to the Bankruptcy Code in 1986 and became permanent in 2005.

To be eligible for Chapter 12, individuals or married couples must meet the following criteria:

• Have a farming or commercial fishing operation.
• Have a "regular annual income" (stable and predictable seasonal income is acceptable).
• 50% or more of the filer's gross income must come from farming or fishing operations.
• Total debts must not exceed $11,097,350 for farmers, and $2,268,550 for fishermen.
• For farmers, at least 50% of the debt must be related to their farming business. For fishermen, this figure is 80%.

Corporations or partnerships may also be eligible for Chapter 12 if they meet the following criteria:

• Owned by a single family that conducts farming or fishing operations.
• At least 50% of the stock or equity is owned by one family.
• 80% or more of the company's value must be in assets related to farming or fishing (e.g., boats, equipment, buildings).
• The corporation or partnership must not have publicly traded stock.

The history of Chapter 12

Chapter 12, a part of Title 11 of the United States Code, is a chapter of the Bankruptcy Code. It was added to the Bankruptcy Code in 1986 by the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. It came into effect on November 26, 1986, as an emergency response to the tightening of agricultural credit in the early to mid-1980s, which coincided with a series of notable bank failures.

Chapter 12 is specifically applicable to family farmers and fishermen, allowing them to reorganise their businesses while maintaining ownership. It is similar in structure to Chapter 13 but offers additional benefits beyond those available to ordinary wage earners. For instance, Chapter 12 provides higher debt ceilings than Chapter 13 and more advantageous exemptions.

Prior to the introduction of Chapter 12, bankruptcy laws in the United States did not include provisions specifically for farmers. The 1898 Bankruptcy Act, for example, did not contain any special provisions for farmers, except that they were immune from involuntary bankruptcy petitions. The Bankruptcy Act of 1933 introduced Section 75, which provided specific provisions for farmers. However, these provisions were limited in scope and required the voluntary cooperation of mortgagors and creditors. The Frazier-Lemke Act later expanded the scope of Section 75, providing stronger protections for farmers under bankruptcy protection. Nevertheless, these changes were temporary and ultimately expired on March 31, 1949.

After the expiration of Section 75, farmers were subject to the same bankruptcy rules as other debtors until the introduction of Chapter 12 in 1986. Chapter 12 was initially introduced as a temporary measure, set to expire on October 1, 1993. However, it was extended multiple times without expiring and eventually became permanent in 2005.

Chapter 12 bankruptcy process

Chapter 12 of Title 11 of the United States Code, or simply Chapter 12, is a chapter of the Bankruptcy Code that became law in 1986. It was initially introduced as a temporary measure but was made permanent in 2005. Chapter 12 is designed specifically for "family farmers" or "family fishermen" with "regular annual income". It enables them to propose and execute a plan to repay all or part of their debts while continuing their operations.

The Chapter 12 Bankruptcy Process:

The Chapter 12 bankruptcy process follows a general outline, although each reorganisation will differ depending on the business. Here is a step-by-step breakdown of the typical process:

• Find an Attorney: First, farmers or fishermen should consult an attorney to assess their eligibility and guide them through the planning process.
• File a Chapter 12 Petition: The process begins with the filing of a petition with the bankruptcy court serving the area where the individual or business is located. The petition includes information on the debtor's income, assets, creditors, and amounts owed. It triggers an "automatic stay," stopping most creditors from pursuing debt collection.
• Provide Supplementary Information: The debtor has 14 days after filing the petition to submit supplementary information, such as income and debt details.
• Notice to Creditors: Once the supplementary information is filed, the court sends a notice to all parties, including creditors.
• Meeting of Creditors: Between 21 and 40 days after the petition is filed, a meeting is held between the debtor and creditors (also known as a "341 meeting"). This meeting is to review documents, ask questions, and verify the accuracy of the petition.
• File a Chapter 12 Plan: Within 90 days of filing the petition, the debtor must file a proposed repayment plan with the court, typically spanning three to five years. The plan must be approved by the bankruptcy court.
• Confirmation Hearing: A confirmation hearing is held within 45 days of filing the plan, where the presiding judge decides whether the plan is feasible and meets the standards for confirmation.
• Plan Implementation: Once the plan is confirmed, the debtor must make regular payments to the trustee, who distributes the funds to creditors according to the plan. This typically lasts three to five years.
• Discharge of Debts: Upon completion of the repayment plan, the court discharges the remaining debts, relieving the debtor from personal liability for those obligations.

Eligibility Criteria:

To be eligible for Chapter 12 bankruptcy, "family farmers" and "family fishermen" must meet specific criteria:

• Income Requirements: They must have a "regular annual income," which can include stable and predictable seasonal income.
• Debt Limits: There are prescribed debt limits, which differ for farmers and fishermen. For farmers, the total debt limit is $11,097,350, with at least 50% stemming from farming operations. For fishermen, the limit is $2,268,550, with at least 80% arising from fishing operations.
• Nature of Operations: More than 50% of the gross income for the preceding tax year (or the previous two to three years for farmers) must come from the farming or fishing operation.
• Business Structure: Both individually owned and corporately owned farms and fisheries can qualify for Chapter 12. For corporations or partnerships, additional criteria include ownership structure, value of assets related to the operation, and public trading of stock.

Benefits of Chapter 12:

Chapter 12 offers several benefits to family farmers and fishermen:

• Higher Debt Ceilings: It allows for higher debt ceilings compared to Chapter 13, accommodating the unique financial challenges faced by these industries.
• Streamlined Process: Chapter 12 is more streamlined, less complicated, and less expensive than Chapter 11, which is better suited to large corporate reorganisations.
• Advantageous Exemptions: It provides advantageous exemptions, such as the ability to reduce secured debt, like farm mortgages and boat loans.
• Business Continuity: It allows family farmers and fishermen to continue their operations while reorganising their finances, providing a tailored framework for their unique economic realities.

In summary, Chapter 12 of the Bankruptcy Code offers a reorganisation process for family farmers and fishermen, providing them with a structured path to repay their debts while maintaining ownership and continuing their operations.

Chapter 12 vs. other bankruptcy chapters

Chapter 12 of Title 11 of the United States Code, or simply Chapter 12, is a chapter of the Bankruptcy Code that was added in 1986 and became permanent in 2005. It is a reorganization bankruptcy specific to family farmers and fishermen, allowing them to restructure their debts while maintaining ownership and continuing operations. Chapter 12 is similar in structure to Chapter 13 but offers additional benefits beyond those available to ordinary wage earners.

Chapter 12 vs. Chapter 11

Chapter 11 is a type of bankruptcy generally filed by businesses and involves reorganizing their assets and debts under court supervision. It is designed for large corporate reorganizations, whereas Chapter 12 is tailored for family farmers and fishermen. Chapter 11 is more complicated and expensive than Chapter 12, making it less suitable for these smaller-scale operations.

Chapter 12 vs. Chapter 13

Chapter 13 is a voluntary reorganization of debt for individuals with smaller debts than those facing family farmers or fishermen. It is designed for wage earners, whereas Chapter 12 is exclusive to family farmers and fishermen with higher debt limits. Chapter 13 has stricter debt limitations, making it less advantageous for those covered by Chapter 12.

Chapter 12 vs. Chapter 7

Chapter 7, also known as "straight" or "liquidation" bankruptcy, involves liquidating a debtor's assets to at least partially satisfy creditors. In contrast, Chapter 12 is a form of reorganization bankruptcy, allowing debtors to retain ownership and continue operations while restructuring their debts.

Frequently asked questions