Chapter 12 Bankruptcy

In addition to the simplicity of filing, Chapter 12 provides some other unique benefits to family farming and fishing enterprises. One of these is the ability to “cram down” debt. What this means is that in the case of a secured loan, the balance may be reduced to the current value of the property acting as collateral. For instance, a farmer could have taken out loans to purchase land, using the land as collateral, when the economy was booming and the land was relatively expensive. Economic downturns then may have reduced the value of land significantly. In the bankruptcy process, the debt would then reduce to this new, lower value.

In Chapter 12 filings, automatic stays, which are common to all bankruptcies, also produce an additional effect. The ‘family’ nature of the enterprises prevents creditors not only from seeking collection from the debtor but also from other debtors liable on debt with them.

Chapter 12 begins with a voluntary petition (the debtor files the petition), and then a trustee is appointed to review documents and oversee the process. Within 90 days of filing, a plan for repayment must be submitted. The plan must span from three to five years unless the court has given special permission for an extension. Creditors must receive at least the amount of money they would have received had the debtor filed for Chapter 7 bankruptcy. The debtor’s disposable income is given to the trustee where it is then distributed to creditors. Usually, the farming or fishing enterprise continues operation throughout the bankruptcy process. After the debtor has made the payments and the set time period has passed, the court discharges the debts.