CHAPTER 12 BANKRUPTCY

Chapter 12  Bankruptcy Code is available only to family farmers and fishermen in certain situations. It is designed specifically for the reorganization of family farms. It is closely modeled after Chapter 13, that chapter of the Bankruptcy Code designed for wage earners, although it has a higher debt ceiling, and therefore applies to many more farm operations.

Business Chapter 12: Chapter 12 is only available to persons who meet the definition of "family farmer" set forth in the statute. There are several tests that must be met in order to qualify as a family farmer.  For purposes of computing the debt ceiling, any debt on a homestead will not be included unless it was granted in connection with the farm operation. 

Under the Bankruptcy Code, those eligible to file as “family farmers” fall into two categories:

1. an individual or individual and spouse, and;

2. a corporation or partnership.

Those falling into the first category must meet each of the following four criteria as of the date the petition is filed in order to qualify for relief under chapter 12.

1. The individual or husband and wife must be engaged in a farming operation.

2. The total debts (secured and unsecured) of that farming operation must not exceed $1.5 million.

3. Not less than 80% of the total debts which are fixed in amount must be related to the farming operation.

4. More than 50% of the gross income of the individual or the husband and wife for the receding tax year must have come from the farming operation.

Please consult your tax advisor or attorney for complete details.

Since its enactment, there has been a substantial amount of litigation concerning whether a person is eligible for Chapter 12. Generally, the debtor must be actively involved in farming operations in order to be eligible. If merely renting out the farmland for cash rent, the debtor will not likely be found to be engaged in farming.