While Chapter 11 is commonly used by businesses to reorganize their debts, Chapter 12 contains special provisions for family-owned farming and fishing businesses.
The most suitable option will depend on multiple factors, but here is a brief overview of how this works.
Chapter 12 is specifically designed for family farmers and family fishermen and sets out several criteria that must be met. Both individuals (and their spouses) and corporations may qualify for Chapter 12, although the requirements differ slightly.
For individuals and married couples, the qualifications include:
being engaged in farming or commercial fishing operation
total debts cannot exceed $11,097,350 for farms or $2,268,550 for commercial fishing
at least 50% of the debts must come from the farming operation, or at least 80% for commercial fishing, excluding home debts
at least 50% of the gross income must come from farming for the previous three tax years, or for commercial fishing in the previous tax year.
For corporations, the qualifications are similar, but:
at least 50% of the corporation’s outstanding stock or equity must be owned by a single family or its relatives
the company cannot be publicly traded and the family or its relatives must conduct the business, and
more than 80% of the value of the corporate assets must be related to the operations.
When filing for Chapter 12, debtors must submit a repayment plan to the bankruptcy court. Under this plan, fixed payments are made to a court-appointed trustee, who then distributes the funds to creditors.
The plan can last up to 5 years and must fully repay certain priority claims and secured creditors must receive at least the value of their collateral. Once the plan is completed, any remaining unsecured debts are discharged by the court.
On the other hand, a Chapter 11 filing is considered a ‘reorganization’ of a business, which also may include a family farm or commercial fishing operation owned by an individual. Unlike Chapter 12, there are no debt limits, nor does a family farm or fishing operation need to meet the income qualifications mentioned above¹.
Overall, Chapter 11 bankruptcy is often more expensive and time-consuming than Chapter 12.
BSA team has prepared a special material dedicated to general information on bankruptcy law.
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¹ See more details on Chapter 11 filling on https://www.filipecasellato.com/post/from-crisis-to-comeback-what-you-should-know-about-bankruptcy-reorganization-plans
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