Chapter 12 (Bankruptcy) Law and Legal Definition

Chapter 12 of the Bankruptcy Code provides for adjustment of debts of a "family farmer," or a "family fisherman" as those terms are defined in the Bankruptcy Code[11 USCS § 101]. It is known as Family Farmer Bankrupty or Family Fisherman Bankruptcy. Chapter 12 is designed specifically to meet the needs of family farmers and fishermen with a regular annual income. In order to qualify as a family farmer under chapter 12

1. The filer must be engaged in a farming operation or a fishing operation.

2. The filer must have no more than $3,544,525 for farming operations, or $1,642,500 for fishing operations. These numbers count both secured and unsecured debts.

3. At least 50% of a farmer's debts must be related to farming expenses. At least 80% of a fisher's debts must be related to the fishing operation.

4. At least 50% of the farmer or fisher's income for the past several years must have come directly from their farming or fishing operation.

A chapter 12 case begins by filing a petition with the bankruptcy court serving the area where the individual lives or where the corporation or partnership debtor has its principal place of business or principal assets. Unless the court orders otherwise, the debtor also shall file with the court (1) schedules of assets and liabilities, (2) a schedule of current income and expenditures, (3) a schedule of executory contracts and unexpired leases, and (4) a statement of financial affairs.

A petition filed under chapter 12 automatically stays most collection actions against the debtor or the debtor's property. A chapter 12 bankruptcy plan usually lasts three to five years. It must provide for full payment of all priority claims, unless a priority creditor agrees to different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all disposable income.

The debtor will receive a discharge after completing all payments under the chapter 12 plan as long as the debtor certifies that all domestic support obligations that came due before making such certification have been paid. The discharge has the effect of releasing the debtor from all debts provided for by the plan allowed under section 503 or disallowed under section 502, with limited exceptions. Those creditors who were provided for in full or in part under the plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

Certain categories of debts like debts for alimony and child support; money obtained through filing false financial statements; debts for willful and malicious injury to person or property; debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated; and debts from fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny are not discharged in chapter 12 proceedings.

The court may also grant a "hardship discharge" to a chapter 12 debtor even though the debtor has failed to complete plan payments. Generally, a hardship discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor's control and through no fault of the debtor. Creditors must have received at least as much as they would have received in a chapter 7 liquidation case, and the debtor must be unable to modify the plan. For example, injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge does not apply to any debts that are nondischargeable in a chapter 7 case.

Chapter 12 bankruptcy is modeled closely after chapter 13, but with a higher debt ceiling than chapter 13 provides. This made it much more beneficial to farmers and fishermen, who must incur higher debts than normal wage earners in the normal course of business.