WHAT IS Chapter 12
Chapter 12 is a specific category of bankruptcy in the United States.
BREAKING DOWN Chapter 12
Chapter 12 is a United States bankruptcy proceeding that specifically applies to family farms or fisheries. Bankruptcy in the United States is a legal term and process referring to an instance in which a business or an individual cannot pay off their outstanding debts. The process begins when a debtor files a petition; then the individual’s assets are measured and subsequently sometimes used to repay the outstanding debt. The bankruptcy process also allows the individual or business that declares bankruptcy a chance to start fresh, as during the process the debtor is forgiven for debts that simply cannot be paid.
Chapter 12 bankruptcy allows the owner of the farm or fishery to reorganize finances and debts while still keeping the farm or fishery. The farm or fishery owner will work with a bankruptcy trustee and creditors to create a payment program that will meet their owner obligations, while still potentially keeping the farm or fishery operating. Both individually run family farms and fisheries, as well as those owned by corporations, qualify for this type of bankruptcy.
In 1986, the U.S. government added Chapter 12 to bankruptcy law though the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. Structured similarly to Chapter 13 bankruptcy, Chapter 12 helps farms and fisheries through the bankruptcy process, and makes that process easier for these types of businesses. The U.S. government originally introduced Chapter 12 in the mid 1980s as a response to a crisis in the farming industry. The act that introduced Chapter 12 was set to expire in 1993, but was extended until it eventually become permanent law in 2005.
Farms, Fisheries & Bankruptcy Laws before 1986
Farmers did not always have special protection in U.S. bankruptcy laws. Prior to 1986 there were other temporary laws that offered relief, but farmers had no consistent consideration from the U.S. government. Prior to Chapter 12, farmers would have to either file for protection under Chapter 11, which can be very expensive and is mainly for large corporations, or Chapter 13, which is mainly for those with relatively small outstanding debts, which is generally not the case for farms and fisheries. There are strict qualifiers for this level of bankruptcy. In order to qualify for this protection, both individuals and corporations must get the majority of income for the farm and or fishery operations. There is also a limit on the size of the outstanding debt.