Chapter 12 Bankruptcy

The bankruptcy laws consist of many different types and sections, each type designed for a specific set of financial circumstances, depending both the type of debt involved, and the debtor. Chapter 12 bankruptcy is just one of the various sections.

This can therefore be a complex process, not just in terms of deciding which "chapter" to file under, but also in terms of gathering the required information concerning the applicant in general and ensuring certain timescales are maintained.

The main reason for bankruptcy from the point of view of the State used to be, and still is, to provide a means for a debtor to get their financial situation back under control.

However, since 2005, there has also been a concern that those who are owed money by the debtor are  paid  out as far as possible, hence the introduction of various means tests etc,.

Chapter 12 bankruptcy was bought in to specifically help farmers and fishermen. In effect, it treats farmers and fishermen as a special case, in that their livelihood is often at the mercy of nature, over which they have absolutely no control.

The state is effectively saying that these groups of people provide an essential service, i.e. the growing of food, but could face complete financial ruin in the event of a bad year of weather.

Chapter 12 was introduced to try and bring in a degree of stability to the food supply chain.

The fact is that if farmers and fishermen have a bad year, their livelihood is gone, but more importantly, so is their contribution to the food supply chain.

Chapter 12 allows the court to take an objective view of a business of this sort when it runs into financial difficulties. Like chapter 13, a list of debtors, creditors, income, expenditure and assets has to be drawn up.

The object of this exercise is firstly to see if bankruptcy is appropriate, and what form it should take. Chapter 12 allows for farming and fishing enterprises to continue trading if the business is financially sound, but has simply suffered severe financial difficulties due to circumstances beyond their control, and which, with a repayment plan and some rescheduling of debt repayment, could if fact recover over the following years.

This means that the enterprise keeps working, no assets are lost, giving rise to the prospect of debtors being paid what is owed to them over an extended repayment period and the further prospect of more business in the future. This is a win-win situation, far more beneficial than the enterprise simply going to the wall with debts unpaid, and with no prospect of any future contribution to the nation's food supply and tax revenues.

However, certain conditions have to be met to qualify under chapter 12, and these vary slightly depending on whether the enterprise is an individual or husband and wife, or a corporation or partnership.

For individuals or husband and wife teams the rules are as follows:

1. Somewhat obviously, the individual or husband and wife must be actually engaged in a farming operation.

2. Total debt of the operation may not exceed $1.5 million.

3. A minimum of 80% of that debt must be directly related to that operation.

4. For the preceding tax year, a minimum of 50% of gross income must have been derived directly from the enterprise.

In the case of a corporation or partnership:

1. Over 50% of the stock or shareholding in the business must belong to one family, or one family and its relatives.

2. The family (or family and relatives) must conduct the operation.

3. Over 80% of the value of the enterprise's assets must be related to the enterprise.

4. Total debt may not exceed $1.5 million.

5. Minimum of 80% of the total debt must be derived from the operation.

6. If the enterprises issues stock, that stock cannot be publicly traded.

As long as these conditions are met, chapter 12 bankruptcy can be entered into, which then consists of the debtor making regular payments to the trustee, in line with the agreed repayment plan.

If these repayments are not made, the court may then convert the case into a full liquidation, chapter 7, bankruptcy.