Chapter 12 Bankruptcy

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Chapter 12 bankruptcy was designed specifically for the family farmer and family fishermen. It allows financially distressed individuals within these occupations to create a repayment plan. They must have regular and verifiable income though the court does recognize the seasonal nature of their work. Chapter 12 removes many of the barriers of chapter 11 and 13. It is more streamlined, less complicated and much less expensive. Farmers and fishermen often have higher debt due to the nature of their jobs. Therefore, they needed a plan designed for their unique needs.

Under Bankruptcy Code, family farmers and family fishermen fall into two categories: (1) an individual or individual and spouse and (2) a corporation or partnership.

Individuals in the first category must meet the following four criteria:

  1. The individual or husband and wife must be engaged in farming or a commercial fishing operation.
  2. The total debts (secured and unsecured) of the operation must not exceed $3,237,000 for farmers and $1,500,000 for commercial fishermen.
  3. For a family farmer, at least 50%, and for a family fisherman at least 80%, of the total fixed debts (not including the family home) must be related to farming or commercial fishing.
  4. More than 50% of the gross income of the individual or the husband and wife for the preceding year must have come from farming or fishing.

A corporation or partnership in the second category must meet the following six criteria:

  1. More than ½ the outstanding stock or equity 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 or commercial fishing operation.
  3. More than 80% of the value of the corporation or partnership assets must be related to the farming or fishing.
  4. The total indebtedness must not exceed $3,237,000 for farming and $1,500,000 for commercial fishing.
  5. A certain portion of the total debt must be fixed (not including the family home) - at least 50% for farming or 80% for fishing.
  6. If the corporation issues stock, it can not be publicly traded.

Chapter 12 works the same as other types of bankruptcy. The debtor files a petition with the court. They must provide a list of all debt, all sources of income, all assets owned and all personal and business expenses. Creditors have the opportunity to respond. A trustee is appointed to the case. The debtor presents a repayment plan to the bankruptcy judge.

The judge approves or denies the plan. If the plan is approved the trustee collects the monthly payments and distributes them to the creditors. If the judge doesn’t approve the plan, the individual reworks and submits a new plan. Once the petition has been filed the creditors can no longer contact the debtor directly for repayment. Everything is handled by the court and the appointed trustee.

Generally the repayment plan lasts three to five years. During this time the plan is binding upon the debtor and all creditors. The trustee monitors the spending habits of the debtor and any new debt must be approved by the trustee. Once the trustee verifies that all debt has been repaid as agreed the bankruptcy is discharged

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