Saving the Family Farm Through Chapter 12 Bankruptcy
If you operate a family-owned farm that is saddled with significant debts, federal law provides a lifeboat in the form of Chapter 12 bankruptcy. While not as well-known as other types of bankruptcy, including Chapter 11 and Chapter 13, a Chapter 12 filing can help family farms stay in business while working towards repaying their creditors in an orderly fashion.
How Can My Farm Qualify for Chapter 12?
Chapter 12 refers to a section of the federal Bankruptcy Code designed specifically for “family farmers” and “family fishermen” who produce “regular annual income” from their operations. To qualify for Chapter 12 relief, a farmer must meet the following tests:
- The farmer must be actively “engaged in a farming operation.”
- The farm’s total debts cannot exceed $4,153,150.
- At least 50 percent of the farmer’s total debts (excluding mortgage debt in the family home) is “related to” the farming operation.
- More than 50 percent of the gross income of the farmer–or the farmer and their spouse, if married–for each of the second and third prior tax years must come from the farming operation.
Even if the farm is organized as a corporation or partnership, it may still be eligible for Chapter 12 relief if most of the business entity’s stock or equity is personally owned by the farmer and his family.
How Does Chapter 12 Work?
Within 90 days of filing a Chapter 12 bankruptcy petition, the debtor must file a proposed “plan of repayment” with the court. This plan provides a roadmap of sort for repaying the farm’s creditors over a period of 3 to 5 years. Secured creditors must receive at least the value of the collateral used to secure the debt. (In some cases, these secured credit repayments may last longer than 5 years.)
Unsecured creditors do not need to be paid in full. But the debtor must commit all of their disposable income to repayment over the life of the plan. In this context, “disposable income” refers to income that is not legally considered necessary for the support of the debtor farmer and their family.
The farm’s creditors have a right to notice of the Chapter 12 proceedings. Any creditor may file an objection to the proposed repayment plan. A bankruptcy judge will hear any objections and undertake an independent review of the proposed plan to ensure it is feasible and otherwise meets the requirements of federal law.
If the plan is confirmed, the farmer will not actually make any direct payments to their creditors. Instead, the farmer makes monthly payments to a Chapter 12 trustee, who in turn ensured individual creditors are paid. The trustee must also approve any new debts the farmer may wish to acquire following confirmation of the repayment plan.
What If Chapter 12 Is Not the Best Option for My Farm?
Chapter 12 bankruptcy cannot save every family farm. If your farming operation lacks sufficient income–even on a seasonal basis–to meet the requirements of a repayment plan, then you may need to consider a different option, such as Chapter 7. With a Chapter 7 bankruptcy, a trustee will simply liquidate your assets (less certain exempt property) and pay back your creditors as much as possible. The court will then issue a discharge for any remaining unsecured debts–without the need for you to meet a monthly payment plan.
If you would like to learn more about these or other potential options from a qualified West Palm Beach bankruptcy attorney, contact the offices of Kelley, Fulton & Kaplan today to schedule a consultation.