You hear a lot about Chapter 7 “straight bankruptcy,” Chapter 11 “business reorganization,” and Chapter 13 “adjustment of debts of an individual.” But probably much less familiar to you is Chapter 12 “adjustment of debts of a family farmer or fisherman.” However, if you qualify for it, Chapter 12 provides some of the best benefits of all these options.
Chapter 12 is specifically designed for family farmers, ranchers, dairy owners, producers of poultry and livestock. (It also applies to family fishermen, much less likely relevant to folks in the Lone Star State.) Its purpose is to save your farm by reducing and restructuring your debts.
Chapter 13 and Chapter 11 are the other two possible options for reorganizing a business, which in the right circumstances could apply to a farm, ranch or similar business. But because Chapter 12 was created for family farmers and ranchers, and has some distinctive advantages, it is usually better than these other two options, again IF you qualify.
Must be “Family Farmer . . . with Regular Annual Income”
A Chapter 12 can be filed by you as an individual, by you and your spouse, or by the corporation or partnership in which you are an owner and which meets certain stock/equity/asset ownership thresholds. The main other qualifications, found in subsections 101(18) and (19) of the Bankruptcy Code, as they apply to farmers and ranchers, are:
- Debt limit: total debt can’t be more than $3,792,650 (likely slightly increasing on April 1, 2013).
- Farming debt ratio: at least 50% of the total debt of the person(s) or entity filing must be from the “farming operation” (as defined in subsection 101(21) ). Exclude for this calculation the debt on the principal residence, as long as this debt didn’t itself arise from the “farming operation.”
- Farming income ratio for individuals: more than 50% of the gross income must have been received from the “farming operation.”
- Family farming corporations or partnerships:
- Ownership: more than 50% of the business ownership must be in one extended family.
- Asset ratio: more than 80% of the business’ assets must be from its “farming operation.”
The Benefits of Chapter 12
Because Chapter 12 is designed for family farming, with a specific debt maximum amount, it is less complicated and usually much less expensive than Chapter 11 “corporate reorganizations,” which often apply to multi-million or even multi-billion dollar businesses. Chapter 12 is also more flexible than Chapter 13. Here are some of its main features:
- The family farming debtor has 90 days—and sometimes even longer—to file a proposed plan. Then he or she is not required to make payments to the trustee under that plan until 30 days after it is approved by the court. This is in contrast to Chapter 13, in which a plan is either filed at the beginning of the case or usually within about two weeks later, and plan payments must be paid to the trustee begin right away.
- Cram down—one of the most important tools under Chapter 12—applies much more broadly than under Chapter 13. In a cram down, you pay secured creditors based not on the full debt amount but rather based on the value of the collateral, when the value of that collateral is less than the debt. In Chapter 12 you can cram down all secured debt, including residential mortgages (unlike Chapter 13), nonresidential mortgages, equipment loans, and vehicle loans. This usually greatly reduces both your monthly debt payment and the total amount of debt that is to be paid.
- If a portion of the farm’s real estate is sold, much less taxes are paid on any profit from that sale.
If you live in, or in the areas surrounding, Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite, Rowlett, Texas, contact bankruptcy attorney Carrie Weir to set up a free initial consultation to learn about this option. Please use the contact form here or by call Carrie Weir at 972-772-3083 to arrange a private meeting.
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