Farmers, Can Chapter 12 Bankruptcy Help You?

Do you own a small farm and are considering bankruptcy protection? Many small farmers face challenging times on a variety of fronts during 2020. Bankruptcy relief can help you not only survive, but also thrive.

The good news is that the U.S. Bankruptcy Code has a chapter designed specifically to aid qualifying farmers adapt to bankruptcy in their unique line of business. It is known as Chapter 12 bankruptcy and here's what you should know about it. 

What Is Chapter 12?

Chapter 12 bankruptcy is modeled after the much more familiar Chapter 13 style bankruptcy. This means it is a repayment plan rather than a straight discharge of debts.

Under Chapter 12, farmers get an automatic stay that prevents creditors from pursuing any further collections action while the bankruptcy payment plan is worked out and executed. Creditors generally do not have to approve the terms of the payment plan. At the end of the repayment period — usually three to five years — remaining eligible debts are usually fully discharged. 

How Does Chapter 12 Benefit Farms?

If Chapter 12 sounds very much like Chapter 13, it also has some advantages designed with the needs of farmers in mind. For instance, the Code recognizes that farmers and fishing operations are seasonal businesses and can't be expected to make the same income year round. So, the requirement for equal payments is waived — allowing for such things as balloon payments and cyclical adjustments

Another useful change is that the debtor isn't the only one who benefits from the automatic stay. Because many farms and fishing businesses are family operations, other family members are often on the hook for some of the debts incurred by the operator. In Chapter 12, additional persons who are obligated to repay debts may be protected from collections along with the actual debtor.

As you are undoubtedly aware, the farming business faces many dangers that are simply beyond your control. Natural disasters, climate issues, or even personal illness can change your fortunes overnight. Chapter 12 makes allowance for this peculiar threat to the industry by providing the potential to get a discharge even if you can't make all your payments due to an unavoidable crisis. 

Finally, one of the most important elements of this chapter is the ability to modify a secured loan to make it less onerous. For example, if a farmer takes out a loan for $60,000 to purchase new farming equipment, several years later that equipment will depreciate to now be valued at only $30,000. In Chapter 12, the debtor farmer may be able to restructure that loan into a new loan of only $30,000.

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How Can You Pursue Chapter 12?

If Chapter 12 bankruptcy might be the right option for you, you should first determine your eligibility. Generally, more than half of your income must be generated by the farming business (or 80% for fishermen). In addition, more than half of your debts must come from this business. While there are debt limitations ($4,153,150 in 2020), farmers who are incorporated or work as a partner may also be eligible. 

What should be your next move if you believe that your farm operation is eligible? As with any complex business bankruptcy, start by speaking with a bankruptcy attorney. Not all bankruptcy firms specialize in farms, so look for one with plenty of experience in this unique chapter. 

Charles J Schneider PC has aided Michigan residents and businesses in finding the right bankruptcy plan and successfully carrying it out until relief by discharge. We can help you too. Call today to make an appointment and get started.