You are likely familiar with a chapter 7, or liquidation bankruptcy, and a chapter 13 personal or consumer bankruptcy where a person’s debts are reorganized to repay creditors by a proportional share of the debtor’s income and assets. However, because of the unique nature of agricultural and fishing operations, in the 1980's a new section of the bankruptcy code was written.
A chapter 11 allows businesses to reorganize their finances while continuing to operate and bring in income to repay a portion of its debts. The debt is restructured through negotiations with creditors who are organized into classes or tiers of priority. Creditors are placed into classes determined by the legal terms of their loan contract with the business. The terms of the restructured debt agreement are memorialized in the bankruptcy plan, which is confirmed by the creditors.
Family farmers and fishermen with regular income have a specific section of the bankruptcy code that applies only to them, due to the unique nature of their business operations. A chapter 12 farm bankruptcy operates similar to a chapter 11 or 13 bankruptcy, where a plan to repay creditors over a three to five year period is placed in a reorganization plan that is confirmed by creditors.
History of chapter 12 farm bankruptcy
The code was enacted in 1986, when the farm economy was crumbling, similar to the Great Depression of the 1930’s. There were massive foreclosures, land values bottomed out, and people lost their land and equipment.
Legislators recognized the unique terms of agricultural lending agreements left farmers without effective protection under the bankruptcy code, regardless of whether they sought relief under chapter 13 or a chapter 11 business reorganization. The legal protections controlling who is paid first in foreclosure, repossession or insolvency granted to creditors financing land, equipment or commodities used in farm operations are unique and complex. Farmers also operate with higher debt levels than that of other industries. These circumstances made negotiating the reorganization and agreeing to confirm the bankruptcy plan an almost impossible task for farmers.
Farm specific bankruptcy protection
In a chapter 12, debtors who are unable to pay can reduce the amount they owe creditors to the value of the property secured by the loan. Restructuring may include lowering interest rates, changing payment amounts or total principal owed, or extending the amount of time for repayment. This frees up cash flow, allowing them to continue farming while paying down debts and keeping their equipment and farmland.
There are requirements on the percentages of income and debt from the operation that you need to meet in order to file as a farmer or fisherman. Individuals or married couples that are both working on the farm as well as farm corporations and partnerships can seek protection under chapter 12 if the income and debt requirements are met.