Chapter 12

What Is Chapter 12?

Chapter 12 is a bankruptcy category in the United States. It applies specifically to family farmers and family fishermen who can no longer pay back their debts.

Deeper Definition

Bankruptcy is a legal proceeding in which individuals or businesses overwhelmed by debt seek relief from some or all of their debts. Typically, when a person or a company realizes that they cannot fulfill their financial obligations to their debts, they may file for bankruptcy. In the United States, Chapter 12 is a bankruptcy category that family farmers and family fishermen can file when under financial distress and cannot pay their debts.

The US Congress introduced the Chapter 12 bankruptcy act in 1986. They did this as a temporary emergency response to farmers’ and fishermen’s difficulties. Although the Act shares some aspects of Chapter 11 and Chapter 13 bankruptcies, it is structured to suit the unique needs of farmers and fishermen. The Act remained temporary for several years until 2005, when it was made permanent.

There are some requirements farmers and fishermen must meet to be eligible for Chapter 12 bankruptcy. If qualified, they would be allowed to reorganize debts into a three or five-year payment plan.

Individuals or married couples who are into farming or fisheries may file for bankruptcy if: 

• At least 50% of their debts come from the farming operation.

• At least 80% of their debts come from the fishing operation.

• In the last tax year, at least 50% of their gross income came from their farming or fishing operation.

A corporation or partnership business may also qualify for Chapter 12 bankruptcy. First, they must meet some of the conditions set for individuals and married couples. For instance, at least 50% of their debts must come from farming operations, or at least 80% must come from fishing operations. Other criteria they must meet include:

• They must not be a publicly-traded company.

• At least 80% of the company’s value must be tied to its farming or fishing operations.

Chapter 12 Example

Michael and his wife are farmers in the United States. They have been in the business for over five years, and things have been going smoothly. However, when a pandemic hit the nation, their business took a nosedive and incurred severe losses. Now, realizing that they would not be able to pay the debts they owe their creditors, Michael and his wife filed for Chapter 12 bankruptcy which enabled them to structure a five-year repayment plan.