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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