When most people think of bankruptcy, they have likely heard of Chapter 7, 11, or 13. These are the most common forms of bankruptcy for which individuals and businesses apply. Chapter 12 is a lesser known bankruptcy provision that applies only to a small subset of the population. If you operate a family farm or a family fishing operation, you may qualify for Chapter 12 bankruptcy. This newest bankruptcy chapter was created in 1986 to provide a financial helping hand to family farms and family fishermen who are struggling with debt.
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Bankruptcy Comparisons
Chapter 12 bankruptcy is very similar to Chapter 13 in that they both involve drafting a repayment plan. In both cases, the individual or business filing for bankruptcy will draft a plan for repaying debts to creditors. Because this type of bankruptcy hinges on repayment, one of the requirements for Chapter 12 is that the family business must have a steady and reliable income which it can use to pay back its debts. Without a regular income, a repayment plan may not be possible and the business may not be eligible for Chapter 12 or 13. If a family business can afford to repay its debts, however, Chapter 12 may provide an advantage because it has a higher debt ceiling than Chapter 13 and so can be more beneficial to family farms that are deep in debt.
Qualifying for Chapter 12
Before filing for Chapter 12, a family-run farm or fishing operation should consider the eligibility requirements. Basically a family business must meet the legal definition of "family farm" to qualify for Chapter 12. First, the total debt that the business owes cannot amount to more than $1.5 million, and 80% of that total debt must be business-related debt. If much of the debt accrued is personal debt, the family business will likely not be eligible to file under Chapter 12. Additionally, the family filing for Chapter 12 must have earned at least 50% of its income from the farm or fishing operation to qualify.
Once it has been proven that a family farm meets these requirements, it can file for bankruptcy and begin to draft a repayment plan. With the help of a bankruptcy lawyer the family farm can determine how much money it can devote to pay back its creditors and how long the process will take, typically between 3 and 5 years. Once the debts have been repaid the family farm or fishing operation will be debt free and can once again attain profitability.
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