Bankruptcy for Farmers and Fisherman - Chapter 12 Bankruptcy For farmers and fisherman who are earning income, Chapter 12 is often a good option because it allows the farmer or fisherman debtor to come up with a plan to repay a portion of the debts that are owed and receive a complete discharge of the debts. Chapter 12 bankruptcy was created in 1986 to assist family farmers in financial distress as a less expensive alternative to a Chapter 11 bankruptcy. It was extended to include family fisherman in 2005. Chapter 12 is similar to Chapter 13 bankruptcy since it provides for a reorganization of debts for debtors that have regular income, but cannot pay all of their expenses.

Under Chapter 12 individuals as well as family partnerships and corporations that are engaged in farming or fishing may be debtors. The debtors may be able to continue their farming and fishing operations and keep their farm, boat, equipment, vehicles and other assets. Chapter 12 allows farmers and fisherman to reduce the amount they owe on certain secured debts to the value of the collateral. This remedy (called a cramdown) makes it easier to keep some kinds of collateral, like a boat, truck or equipment. Chapter 12 also allows you to strip off junior liens on a home if the value of the home is less than the first mortgage. The stripped loan is reclassified as an unsecured loan.

Unlike a Chapter 7 bankruptcy, a Chapter 12 bankruptcy requires a payment plan. The Plan requires you to keep current the debts that secure collateral that you want to keep like a mortgage or boat note and pay off priority debts like back taxes, back child support owed to a child or ex-spouse, and any mortgage and secured debt arrearages that you owe. You also have to pay unsecured creditors as least as much as they would have received had you filed for Chapter 7 bankruptcy. This means the payments must be at least equal to the value of your nonexempt property, less the costs and fees that would have to be paid in order to sell the property. The repayment plan lasts three years but can be extended to five years.

Like a Chapter 13 there are monetary qualifications for Chapter 12 debtors. A family farmer’s aggregate debts may not exceed $3,544,525. A family fisherman’s debts may not exceed $1,642,500. In order to qualify as a farmer or fisherman in Chapter 12, 50% of the debtor’s income and 80% of the debts must arise from farming operations or commercial fishing operations. A farming operation includes farming, tillage of soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state. A commercial fishing operation includes the catching or harvesting of fish, shrimp, lobsters, urchins, seaweed, shellfish, or other aquatic species or products of such species; or aquaculture activities consisting of raising any of the above for market. A Chapter 12 allows farmers and fisherman to continue to operate their business and submit a plan to reorganize their debts. The plan is similar to a Chapter 13, the plan provides for the submission of all of the debtor’s future earnings or income to the supervision and control of the Chapter 12 trustee to the degree it is necessary for the execution of the plan.

For unsecured debts, two alternatives are available. The plan must either provide for total repayment of the unsecured debt, or the debtor must agree to contribute all of his disposable income to the payment of these debts. The repayment can be extended over a three year period; unless cause for a longer repayment period is shown, then the court may extend the term of the plan for up to five years. If the plan does not provide for full repayment of unsecured claims, the debtor must agree to contribute his or her entire disposable income to the payment of this debt during the term of the plan. However, the statute specifically defines "disposable income" to include only that income which remains after all farm and living expenses have been paid. For secured debts, the secured creditors must either approve the plan and retain the lien securing the claim while payments are made or receive the collateral. If the debtor's plan provides for the repayment of a secured debt, the creditor's security interest remains intact during the repayment period.

The amount of the debt will generally be reduced to the present value of the secured property. The debtor's plan may provide for a repayment schedule which extends beyond the terms of the original secured debt. The plan itself is limited to five years, but there is an exception for specific long term debt. Long term debt may be paid over a period exceeding five years. Typically the repayment period of the economic life of the machinery and equipment and twenty years for real estate. During the repayment period the debtor will pay the market rate of interest on the debt.