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Chapter 12 Bankruptcy

America has a long history of people working the land. In the 1939 book “The Grapes of Wrath” by John Steinbeck portrays the Joads, a family living in the dustbowl in Oklahoma during the Great Depression. To get away from the rampant destitution in their home town, they decide to travel to California in search of work. They head out west together with other “Okies.” When they arrive in California, they discover that a number of other people came to California in search of similar work, creating an oversupply of those willing to work the fields. This keeps wages low. In response, Tom Joad becomes a labor organizer and works to help those finding difficulty with the agrarian power structure.

This highlights the longstanding connection between American workers and their farms. While the American farm population has seen a steady decline over the past 70 years, Congress felt that it was worthwhile to provide extra protections to those who work on family farms by enacting such measures as the United States Bankruptcy Code, or the Code – particularly Chapter 12 of the Code, enacted in 1986.

Initially set to expire in 1993, Congress extended the life of Chapter 12. In 2005, with the passage of the Bankruptcy Abuse Prevention Creditor Protection Act, or BAPCPA, which made sweeping changes to the Code, Chapter 12 became a permanent fixture in United States Bankruptcy law.

Qualifying for Chapter 12

To qualify for Chapter 12, a debtor must be a “family farmer or family fisherman with regular annual income.” The regular annual income requirement ensures that the debtor will have sufficiently stable income to make payments under a chapter 12 plan. Unlike chapter 13, which is limited to individuals, a debtor in chapter 12 may be an individual, a corporation or a partnership.

The Code defines a family farmer as an individual, corporation or partnership. An individual must:

  • Own and engage in a farming operation;
  • Have aggregate debts of less than $4,153,150;
  • Have at least half of his or her debts (excluding debt on a principal residence) arise out of the farming operation (i.e., primarily business debt related to the farm); and
  • Receive more than 50% of his or her gross income from the farming operation for either the preceding taxable year or both the second and third preceding taxable years.

The definition of a farming operation includes dairy farming, ranching, and the production of crops, poultry, or livestock, or products from the same (e.g., eggs). If the family owns the land and is renting it for cash (as opposed to a share of the crop) rather than directly working the land, the family-owner may fail to satisfy the definition of a farming operation.

For a corporation or partnership, the following elements must be present:

  • Be at least 50% owned by one family and its relatives;
  • Have farming operations that are conducted by the family or its relatives;
  • Have at least 80% of its value derived from assets related to the farming operation;
  • Have aggregate debts of less than $4,153,150;
  • Have at least half of its debts (excluding debt on a principal residence of a member of the family) arise out of the farming operation (i.e., primarily business debt related to the farm); and
  • Not have publicly traded stock.

Debt Limit Contrast

Note the debt limit contrast between a debtor filing for Chapter 13 versus a debtor filing for Chapter 12. Under Chapter 13, a debtor’s debt limits are $383,175 of unsecured debt and $1,149,525 of secured debt whereas a Chapter 12 debtor has debt limits of $4, 153, 150 or aggregate debt. Many debtors who are otherwise good candidates for Chapter 13 do not qualify because they exceed debt limits and therefore are compelled to file under Chapter 7. Chapter 12 debtors have a much higher ceiling so it is almost certain that an individual Chapter 12 debtor will comply with the debt limit requirements of a Chapter 12.

Operation of a Chapter 12 Case

Chapter 12 bankruptcy has strong similarities to Chapter 13 with significant similarities to Chapter 11. Like Chapter 13, a Chapter 12 bankruptcy requires a plan wherein a debtor will look to repay debt to a trustee on a monthly basis. Upon completion of the plan, the debtor receives a discharge. At the same time, the debtor acts as a debtor-in-possession, or DIP, with respect to the farm. Like a Chapter 11 DIP, a Chapter 12 DIP can reject certain contracts and has certain trustee powers.

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