One of the least used bankruptcy Chapter in the USA is Chapter 12. It has a very narrow range of types of debtors who is eligible for this Chapter and we will describe it in details in our review.
Chapter 12 was invented by the Congress after many farms and fisheries faced severe hardship in 1980. Hundreds of operations were on the edge of financial catastrophe, and the opportunity to ease the burden and postpone the debt repayment became a very relieving solution. Taking into account that farms and fisheries are seasoned business, no wonder these are always under the risk of financial distress.
Chapter 12 bankruptcy allows a business like farms and fisheries create a repayment plan like it is possible under the Chapter 13. Still, Chapter 12 has a significantly higher debt ceiling and some other specifics we will review below.
Who is eligible for Chapter 12?
Chapter 12 is only available for family farms and family fisheries suffering from serious financial hardship. Family businesses with significant debt and a willingness to repay the debt in the future may file for bankruptcy under Chapter 12.
Along with the debtor who files for bankruptcy, all connected to the farm (or fishery) family business individuals automatically receive protection from the creditors.
The debt ceiling for farms is $4,031,575 and for fisheries it is $1,868,200. As soon as a farmer or a fisherman files for a case, all creditors are prohibited to take any actions against the debtor. The debtor has a full and comprehensive protection from the government, even if not all creditors have approved the repayment plan developed by the debtor.
In order to receive a protection under Chapter 12, the debtor must match several key requirements. The court appoints a Trustee for the distressed farm or fishery, who arranges a meeting with creditors. Creditors interview the debtor about the bankruptcy and his financial situation as well as about the details of the repayment plan.
What are the benefits of Chapter 12?
If we’ll compare filing for bankruptcy under Chapter 12 with other bankruptcy chapters, we’ll find out it brings the debtor several essential benefits:
- The debtor keeps all the assets intact and his business performs in a normal mode without interrupting business processes. Instead of receiving the total debt discharge and starting everything from the blank sheet, the debtor receives the chance to get back on track as soon as possible and postpone the repayment of th debt.
- Debt ceiling. The debt ceiling (the maximum sum of the debt) is much higher than for other chapters.
- Automatic Stay. Right after the case is filed, the Automatic Stay comes into effect which means any actions from the side of collectors or creditors must be stopped immediately. Automatic Stay rule is valid for all members of the bankrupt business, not only for the person who applies and fills in the forms.
Specifics of filing for bankruptcy under Chapter 12
In order to have a court protection under Chapter 12, a family farm or fishery will have to prove the debts have arisen exactly from the family business operations. All financial papers will be evaluated thoroughly by the court and if the court will find out the unbearable debt was a result of intentional actions (or easily preventable negative factors), the debtor will get a refusal.
The repayment plan has to be very specific and show the exact scheme on how the debtor will repay the debt in following 3-5 years.
After the judge has approved the plan, all the payments will be made through the Trustee. The Trustee distributes the money between creditors in accordance with the agreed priority.