What Is Chapter 12?

Chapter 12 is a category of bankruptcy in the United States that applies specifically to farms and fisheries. It allows proprietors of farms and fisheries to reorganize their finances and debts while still maintaining ownership of their assets. Generally, debtors in such cases work with a bankruptcy trustee and creditors to craft payment programs based on their current financial obligations. The repayment programs vary in duration between three and five years. Both individually run family farms and fisheries and those owned by corporations qualify for this type of bankruptcy.

Key Takeaways

  • Individually owned and corporate-owned farms and fisheries can file for chapter 12 bankruptcy, allowing them to reorganize their debt and finances in consultation with creditors.
  • Chapter 12 was introduced in bankruptcy law as a temporary measure in 1986 and became permanent in 2005.
  • Farmers and fisheries must meet several requirements in order to be eligible for filing, including limits on debt and qualifying percentages of income and debt.

Understanding Chapter 12

Farmers and fisheries filing for bankruptcy must fulfill several requirements in order to be eligible for Chapter 12 bankruptcy. Just one example: More than 50% of the gross income for a married couple must have come from their farming operation in the previous tax year in order to be eligible for the bankruptcy. In addition, 50% of debt that is fixed in amount must be related to their farming business, which means that property, such as a home, is not eligible to be counted.

Depending on the state of the economy and commodity prices, there are prescribed debt levels for those seeking to file for Chapter 12 bankruptcy. The Farmer Family Relief Act of 2019 increased debt limits for this type of bankruptcy for farmers from $3.3 million to $10 million. The increase was a response to ballooning U.S. farm debt of $400 billion. The debt was necessitated by both prevailing economic realities and extreme weather conditions. A trade war with China, a large and important market for farmers, resulted in tariffs on American farm products. The frequency of hot days and hurricanes also adversely affected farmers' crops.

Chapter 12 bankruptcy follows the same process as other bankruptcies. The process begins when a farmer or fisherman files a petition. Meetings are then held with creditors under court supervision, and business assets are measured and subsequently sometimes used to repay the outstanding debt. Chapter 12 also has an automatic stay provision for consumer debt that prevents creditors from collecting debt.

History of Chapter 12

In 1986 the U.S. government added Chapter 12 to bankruptcy law through the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. Structured similarly to Chapter 13 bankruptcy, Chapter 12 was designed to help farms and fisheries through the bankruptcy process. The U.S. government originally introduced it in the mid-1980s as a response to a debt crisis in the farming industry. As a result of downward-spiraling commodity prices, industry debt rose to approximately $216 billion by the end of 1983. Chapter 12 bankruptcy allowed farmers relief to service that debt. The act that introduced Chapter 12 was set to expire in 1993, but it was extended until it eventually become permanent law in 2005.

Prior to 1986 farmers did not always have special protection in U.S. bankruptcy laws. There were other temporary laws that offered relief, but farmers had no consistent consideration from the U.S. government. They had to file for protection under either Chapter 11, which can be very expensive and is mainly for large corporations, or Chapter 13, which is mostly for those with relatively small outstanding debts—generally not the case for farms and fisheries. Chapter 12 was designed to rectify those disadvantages for farmers and fishermen.