What Is The Difference Between Chapter 12 and 13 Bankruptcy?

Posted by on Feb 16, 2013 in Bankruptcy | 0 comments

Most of us have heard of Chapter 7 or Chapter 13 bankruptcy, maybe even Chapter 11. But Chapter 12 is a relative unknown because it is specifically designed for the struggling family farm or fishery owner who may have need of debt relief.

Difference between Chapter 12 and 13

Chapter 12 is also a recent arrival on the scene, making its debut appearance in 1986 in Bankruptcy Law. It closely resembles Chapter 13 in many respects except that it has a much higher debt ceiling. This is because family farm or fishery owners have higher overhead costs than the average wage earner and as a result, often find themselves in more debt. Otherwise, it is also a financial reorganization protected by the court, and best handled with the assistance of an experienced lawyer like the ones found here.

Rationale Behind Chapter 12

Because of the limited debt ceiling of Chapter 13, farm and fishery owners who need debt relief used to seek the protection of the court by filing for Chapter 11 bankruptcy, which is designed for large corporations. It was expensive and complicated, and most small outfits could not afford to declare bankruptcy under Chapter 11. Chapter 12 was enacted into law by Congress but it was supposed to only be a temporary measure. It even had an expiration date! No filings were supposed to be allowed after September 30, 1993, but it met a very real need so well that it continues to be used today.

Eligibility

Eligible family farms or fisheries may be registered as a single proprietorship, partnership, or corporation. However, to be eligible for Chapter 12 protection, the following conditions must be met:

  1. The primary business must be farming or commercial fishing
  2. For corporations, majority stock must be held by one family and its relatives
  3. Total debts for a farm must not be more than $3,792,650 or $1,757,475 for a fishery
  4. The debts of a farmer must at least be 50% (and for a fisher 80%) due to the primary operation of the business (farming or fishing)
  5. A majority of the assets of a corporation or partnership (>80%) came from the primary operation, or 50% of the individual or the couple’s gross income, from the tax year past
  6. Corporate stock is not publicly traded.

Should you happen to need to make such a decision, a bankruptcy lawyer can be instrumental in determining which kind of bankruptcy is most appropriate for your business.

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