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Understanding Chapter 12 bankruptcy eligibility

On Behalf of | Jan 11, 2018 | blog

Chapter 12 bankruptcy was enacted in the 1980s as a response to an ailing farming industry. It shares some similarities with Chapter 13, but it also accounts for farming’s seasonal nature and thus offers more flexibility with payments.

Less complex than its Chapter 11 counterpart, Chapter 12 has a narrow eligibility range. Mainly serving family farmers—though partnerships and corporations can also qualify—this form of bankruptcy caters to a specific subset of debtors. To petition for Chapter 12 bankruptcy, you must meet a set of standard criteria.

Eligibility as an individual

In order to qualify for Chapter 12 bankruptcy as an individual, here are the requirements:

  • An individual (or husband and wife) must actively run a farming operation.
  • The total amount of secured and unsecured debt for their farming business cannot exceed $3,237,000.
  • At least 50 percent of the individual’s debt—not including a home mortgage—must be farming operations-related.
  • More than 50 percent of individual’s gross income from the preceding tax year must have been farm-generated.
  • Annual income must be stable enough to meet a Chapter 12 payment plan.

Eligibility as a corporation or partnership

Chapter 12 bankruptcy is available to corporations or partnerships that qualify. These groups can obtain Chapter 12 relief by meeting these standards:

  • The corporation or group’s debts must not be greater than $3,237,000.
  • More than 50 percent of the group’s outstanding stock or equity must be under one family’s ownership—this can include extended relatives.
  • The family must operate the farming business in question.
  • More than 80 percent of the group’s assets must be farming operations-related.
  • The corporation cannot issue publically traded stock.
  • 50 percent of the debts belonging to the corporation or partnership must be farming-related.

While Chapter 12 bankruptcy has some stringent requirements, it can be a helpful financial tool for your farming operation. Beyond meeting the eligibility standards, it’s important to consider everything else that Chapter 12 entails. If you’re considering this or any other form of bankruptcy, it can be helpful to consult with an experienced attorney.