A Guide to Chapter 12 Bankruptcy

by | Aug 19, 2021 | Chapter 12 Bankruptcy |

A Chapter 12 bankruptcy allows family farmers and family fishermen to avoid foreclosures or liquidations by restructuring their debts. Congress enacted Chapter 12 of the Bankruptcy Code in 1986 in response to the farm financial crisis in the 80’s, and it has been an important means of assisting struggling farmers since then.

Chapter 12 allows a family farmer to establish a repayment schedule over a period of time, and has additional benefits beyond what is available in Chapter 11 or 13. Here is a brief Chapter 12 bankruptcy guide about the basics of filing, repayment and discharge.

Who Qualifies for a Chapter 12 Bankruptcy?

To file a voluntary petition for relief, you must:

  • Be engaged in a farming operation.
  • Have a regular annual income, sufficient to pay according to the terms of your Chapter 12 repayment plan. Seasonal income is sufficient if you make the agreed-upon payments.
  • Debts must not total more than $10 million for farmers or $2,044,225 for fishermen.
  • Debts (other than home mortgages) must be related to the business operations – at least 50% of total debt for farming operations or 80% of total debt for commercial fishing operations.
  • Gross income (over 50%) must be derived from farming or commercial fishing operations.
  • Corporations and partnerships qualify only if a single family owns more than 50% of their stock (not publicly traded) or equities, and more than 80% of its assets are related to the farming operation.

How Does a Chapter 12 Bankruptcy Work?

Wisconsin bankruptcy attorneys walk you through the steps of the Chapter 12 bankruptcy process, file necessary forms, and prepare the plan of reorganization. Here’s how the process works:

  • A petition for relief is filed with the court.
  • A bankruptcy trustee is assigned to oversee payments.
  • A debtor must provide a repayment plan within 90 days of filing bankruptcy.
  • Discharge of debt is granted by the court if repayment obligations are met.

Three to five years is the usual time for repayment, but secured debts (such as mortgage claims) may be payable over a longer period.

Tax Implications of Chapter 12 Sales

One significant benefit that Chapter 12 has over other bankruptcy chapters, is the ability to discharge tax liability arising from the sale of farm assets.  In some cases, asset sales are unavoidable, or may be part of the strategic plan prepared by the Debtor and the Chapter 12 Attorney.  In many farm sales, huge capital gains triggered by the sale will result in large tax liabilities.  However, those tax liabilities can be treated as dischargeable debt, and in many cases do not need to be paid.  This is a fact specific inquiry, so must be analyzed closely by an attorney familiar with Chapter 12 issues.

How Can a Lawyer Help With Bankruptcy?

Steinhilber Swanson LLP assists you with all aspects of your case from filing through discharge. We are the team you can trust for high-quality and experienced legal services personalized to your needs.

Sources:

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-12-bankruptcy-basics