Chapter 12 Bankruptcy
What Is Chapter 12 Bankruptcy?
A Chapter 12 bankruptcy combines the elements of a Chapter 13 and a Chapter 11 bankruptcy to make it possible for family farmers and family fisherman to find relief in the bankruptcy court. A Chapter 12 is more streamlined and less expensive to accommodate the special needs of a family farmer or family fisherman. It is also completely voluntary – - creditors cannot force a debtor into a Chapter 12 bankruptcy. In a Chapter 12 case, debtors fall into two different categories. The first category is for individuals or married couples and the second is for corporations or partnerships.
Who is eligible to file a Chapter 12 bankruptcy?
Farmers and fishermen falling into the first category must meet the following criteria to be eligible to file under Chapter 12:
- The debtor or debtors must be engaged in a commercial fishing operation or operate a family farm.
- Secured and unsecured debts cannot exceed $3,792,650 for a farm or $1,757,475 for commercial fishing operations.
- Debts, exclusive of the debt for the debtor’s home, must be at least 50% related to the debtor’s farming operation or 80% related to the debtor’s fishing operation.
- More than 50% of the gross income for the preceding tax year must have been generated from farming or commercial fishing operations. In the case of a family farmer, the 2nd and 3rd previous years must also follow this requirement.
In order for a corporation or partnership to fall within the second category to be eligible to file for relief under Chapter 12, it must meet each of the following criteria as of the date of filing:
- More than 50% of the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives.
- The family or the family and its relatives must operate and run the business.
- Moe than 80% of the value of the corporate or partnership assets must be related to the farming or fishing operation.
- The total indebtedness of the debtor cannot exceed $3,792,650 for a farming operation) or $1,757,475 for a fishing operation.
- The total debts, which are fixed (except for debt for one home occupied by a shareholder), must be at least 50% for a farming operation or 80% for a fishing operation related to the business.
- If the corporation issues stock, the stock cannot be publicly traded.
In addition to the above criteria, if the debtor or debtors are individuals, each must complete the mandatory credit counseling course within 180 days prior to the filing of the bankruptcy petition. A Chapter 12 bankruptcy is started in the same manner as any other bankruptcy case with the filing of a voluntary petition. As with the other chapters of bankruptcy, a Chapter 12 debtor must also file schedules and statements to report its assets, liabilities, income, expenses and information about its financial history.
What happens after Chapter 12 bankruptcy is filed?
When a Chapter 12 is filed, a trustee is appointed as in a Chapter 13 case. The trustee will act in almost the same capacity as a Chapter 13 trustee by evaluating the case and acting as the disbursement agent. Just as with all other bankruptcy cases, when you file a Chapter 12 case, an automatic stay is in effect preventing creditors from initiating or continuing any collection actions including lawsuits, wage garnishments and contact with the debtor to demand payment. Chapter 12 contains a special automatic stay provision that protects co-debtors from collection efforts by creditors for consumer debts if they are labile with the debtor (i.e. debts incurred for personal, family or household purpose). This special automatic stay will remain in effect unless modified by the court.
Within 35 days after the filing of the Chapter 12 bankruptcy, the trustee assigned to the case will hold a meeting of creditors otherwise referred to as the First Meeting of Creditors. The trustee will place the debtor under oath, ask the debtor questions regarding the case, and open the floor for any creditors who may wish to ask questions of the debtor. The hearing will be adjourned and the debtor will then proceed to a confirmation hearing.
In a Chapter 12 case, the debtor must file a plan with the court within 90 days of the date that the voluntary petition was filed. The plan must set forth how the debtor intends to reorganize its debt to pay its creditors. The plan must provide for payment in full of priority debts (i.e. taxes, wages, etc.) and pay secured creditors a minimum amount that is equal to the value of the collateral the creditor is holding as security for the debt. Unsecured creditors may or may not receive the full amount owed; however, the plan must pay an amount equal to the debtor’s disposable monthly income. The plan must be served on all parties and creditors who will then have 21 days to object to the confirmation of the plan.
Within 45 days after the filing of the plan, a bankruptcy judge will hold a confirmation hearing to determine if the plan that has been filed meets the standards set forth under the bankruptcy code and is feasible. If the judge approves the plan, and there are no objections to the plan that have not already been resolved between the parties, the judge will confirm the plan. The debtor will then continue paying the trustee for the term of the plan, typically 3 to 5 years, and follow the conditions set forth in the plan.
Completing a Chapter 12 bankruptcy
The debtor in a Chapter 12 will receive a discharge after completing that all payments under the plan have been made, any domestic support obligations that came due have been paid and the required financial management course has been completed. At that time, creditors will be barred from initiating or continuing any legal action against the debtor to collect the discharged debts.
How can I file a Chapter 12 case?
The first step is to contact The Law Office of Gene F. Turnwald for a free bankruptcy consultation. Attorney Turnwald has the experience and knowledge to help you find a solution to your financial problem. Our office is dedicated to helping people just like you find an affordable resolution to your debt issues. Call us today for your free consultation!