Restructuring the Family Farm
Chapter 12 bankruptcy is a special section of the Bankruptcy Code that provides for the restructuring of the debts of a family farm or family fisherman’s business. It provides powerful tools to debtors, sometimes enabling them to reduce their debts or restructure their payments so that they can continue farming or fishing as their livelihood. Chapter 12 was first created in October 1986 and was recently made permanent by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the 2005 Bankruptcy Act). Chapter 12 has been an important tool for farmers in financial distress, both as a bankruptcy option and as a base line for negotiations outside of bankruptcy.
Who is eligible for Chapter 12?
For a farmer or a farm business to be eligible for Chapter 12 relief, the farmer or the farm business must be “engaged in a farming operation” and must meet other specific eligibility requirements. These requirements consider the amount of debt, the percentage of the debt that comes from the farming operation, and the percentage of income that comes from the farming operation. For farm businesses, family ownership and control is also required.
- An individual or a married couple that engage in a farming operation are eligible for Chapter 12 relief if they meet each of the following specific eligibility requirements:
The farmer’s total amount of debt cannot be greater than $3,237,000. This limit will increase in future years
- At least fifty percent (50%) of the debt must come from the farming operation.
- The farmer must meet a gross income from farming test. More than fifty percent of the gross income for the taxable year before the year that the bankruptcy is filed must be from farming operations.
- A corporation or partnership that engages in a farming operation can also be eligible for Chapter 12 restructuring if more than 50% of the outstanding stock or equity in the partnership is held by one family
This family or their relatives must conduct the farming operation.
- The debts of the corporation or partnership must not exceed $3,237,000
- More than 80 % of the value of the corporation or partnership must be related to the farming operation.
How does Chapter 12 work?
Chapter 12 provides many alternatives for reorganizing family farm debts. In many cases, it allows a debtor to reduce a mortgage to the current value of the property and to greatly reduce unsecured obligations. In order to accomplish this type of restructuring, Chapter 12 provides an orderly framework of reorganization. A Chapter 12 bankruptcy begins when the debtor files a Chapter 12 petition with the clerk of the Bankruptcy Court.
Within 90 days of filing the bankruptcy, the Chapter 12 debtor is required to submit a reorganization plan to the bankruptcy court.31 The creditors do not need to approve of this plan; the creditors will not have an opportunity to vote on the plan. The debtor, however, will have to obtain court approval or “confirmation” of the plan. The confirmation process is the process by which the debtor presents the plan to the court and defends the plan against objections that may be raised by creditors. In order for a plan to be confirmed, it must meet the specific confirmation requirements set forth in Chapter 12.
John Ellsworth has been working with and helping farmers since 1972 when he first opened his law practice in Pike County, Illinois (self-proclaimed “Pork Capital of the World”). John began with a tax and bankruptcy practice specifically to help farmers with tax and bankruptcy issues. The practice has now grown to a two-state practice, including both Illinois and Wisconsin. Both states are where John Ellsworth is licensed to practice law. John is admitted to all three bankruptcy courts in Illinois–the Southern District, the Central District and the Northern District, and both bankruptcy courts in Wisconsin, the Western District and the Eastern District. He can practice law in all federal and bankruptcy and state courts in Illinois and Wisconsin.
If you or someone you know is considering filing bankruptcy and “getting out of farming,” please be sure to direct them to this webpage where they might decide to call John Ellsworth first and have a free phone consultation. Our toll-free number is 1-800-946-8122
Many attorneys do not file Chapter 11 and Chapter 12 cases. Here is where John Ellsworth Law Group can provide you with much-needed experience and help.
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