Chapter 12 of the federal bankruptcy code provides debt relief to financially stressed family farmers and, since 2005, fishermen with regular income. It was first enacted in 1986 in response to the farm financial crisis of the early- to mid-1980s and was subsequently renewed by Congress in 1993, 1998, and 2003.
The primary purpose of Chapter 12 bankruptcy is to give small farm owners a chance to reorganize their debts and keep their farms. Modeled after Chapter 13 (also known as “wage earner plan”) bankruptcy for consumers who repay past debts with future income, a debtor farmer files a plan with the courts to repay outstanding debts over time. Chapter 12 has higher debt ceilings than Chapter 13 consumer bankruptcies to accommodate the large debts that are often associated with operating a farm, yet it is also more streamlined and less expensive than the Chapter 11 bankruptcies used by large corporations.
While regular debt repayments are being made, the farming operation continues. Allowances are also made in a Chapter 12 plan for situations in which family farmers have income that is seasonal in nature. Only a few hundred people file for Chapter 12 bankruptcy annually compared to hundreds of thousands who file for Chapter 13.
In summary, bankruptcy options for farmers include:
• Chapter 12;
• Chapter 11 (large farm corporations);
• Chapter 13 (personal bankruptcy) if their debts fall within the maximum allowable limit;
• Chapter 7 (liquidation) if they have no current source of income with which to repay debts.
We would like your feedback on this Personal Finance Frequently Asked Question.
