Chapter 12 Bankruptcy Law Information

Chapter 12 of the Bankruptcy Code was enacted by Congress in 1986, specifically to meet the needs of financially distressed family farmers. The primary purpose of this legislation was to give family farmers facing bankruptcy a chance to reorganize their debts and keep their farms.

In tailoring chapter 12 to meet the economic realities of family farming, Congress eliminated many of the barriers that family farmers had faced when seeking to reorganize successfully 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 the large corporate reorganization. In addition, few family farmers find chapter 13 to be advantageous, because it was designed for wage earners who have smaller debts than those facing family farmers. In chapter 12, Congress sought to combine the features of the Bankruptcy Code which can provide a framework for successful family farm reorganizations.

The Bankruptcy Code provides that only a family farmer with "regular annual income" may file a petition for relief under chapter 12. The purpose of this requirement is to ensure that the farmer-debtor's annual income is sufficiently stable and regular to permit the debtor to make payments under a chapter 12 plan. Allowance is made under chapter 12, however, for situations in which family farmers may have income that is seasonal in nature. Relief under this chapter is voluntary; thus, only the debtor may file a petition under chapter 12.

Under the Bankruptcy Code, those eligible to file as "family farmers" 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 corporate 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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