In Idaho, we have an expansive farming community. In such a busy world, it is refreshing to see families working together to till the ground, harvest the plants, and raise cattle. Unlike other industries, farming is heavily dependent on the weather. Because of this dependency, farmers can experience a year of abundance followed by a year of devastation and struggle. With the weather directly impacting harvests and bottom lines, financing a farm can be tricky.
Thankfully, for the tough years when harvests and profits are low, the Chapter 12 Bankruptcy Law can provide relief and assistance.
What is Chapter 12?
Chapter 12 is a way for farming families and fishing families to reorganize their debts. Generally, the debts need to be repaid within three years, but extensions can be granted to allow up to five years.
Chapter 12 Bankruptcy is different than other chapters of bankruptcy. For example, Chapter 7 Bankruptcy is a total liquidation bankruptcy. While it does not require a repayment plan, it does require you to sell many, if not all, of your assets. Chapters 11 and 13 Bankruptcy are debt-restructuring options. Chapter 11 Bankruptcy is more targeted toward big businesses. While they do not have to liquidate assets, they do go on a repayment plan and are allowed to continue operating their business. Chapter 13 Bankruptcy is similar to Chapter 11, but the debt limit for Chapter 13 is $2,750,000.
The reason Chapter 12 was created was to provide relief to farmers' specific and unique needs. Often, a farmer’s debts will exceed the limit to file for Chapter 13. That leaves them with the options of Chapter 7—selling their farm equipment–or Chapter 11–a lengthy and expensive process. Because neither of those is well-suited for farmers, Chapter 12 was created. Chapter 12 provides a more efficient way for farmers to reorganize their debts while continuing their operations.
Qualifying for Chapter 12 Bankruptcy
If your farming season was difficult, and your profits were not what was projected, filing for Chapter 12 Bankruptcy is a logical step to alleviate some of that debt pressure. To qualify for Chapter 12, there are some requirements that must be met.
Farms Owned by an Individual or Married Couple
If the farm is owned by one person or a married couple, there are four stipulations that must be met by the time the petition is filed:
- The individual or the married couple must be commercial farmers.
- 50% of your income must come directly from farming the previous year.
- The debts of the farm cannot exceed $11,097,350. This amount was increased from $4 million in 2019 and has since been adjusted for inflation.
- At least 50% of your debt must be directly related to farming.
Farms Owned by a Corporation or Partnership
If the farm is owned by a corporation or a partnership, there are more and different stipulations that must be met by the time the petition is filed. First of all, they must also meet numbers three and four from above–the debt cannot exceed $11,097,350, and at least 50% of that must be from farming. Beyond that, here are the criteria that must be met if the farm is owned by a corporation or partnership:
- More than half of the stock or equity must be owned by one family.
- One family must operate and work on the farm. This can be on the farm itself or from an on-site office. You cannot hire workers and own the farm from afar.
- 80% of the corporation’s value must be assets or equipment related to farming.
- If the farm has stock, it cannot be publicly traded.
If you have met the eligibility requirements above, there are a few other stipulations to be aware of. There are a few things that will disqualify you from filing for Chapter 12, and they are:
- In the past 180 days, if you filed for bankruptcy and it was dismissed due to your failure to appear in court or comply with court orders, you are ineligible to file for Chapter 12.
- In the preceding 180 days, you need to have sought out and attended credit counseling, or else you cannot file for Chapter 12.
- If creditors who hold liens on your assets have asked the court for your property, you are ineligible for Chapter 12.
An emergency petition can sometimes be filed to get around these eligibility requirements. To do so, reach out to an experienced attorney for support.
Filing for Chapter 12
When you apply for Chapter 12, you will need to provide forms and statements about your business, and then you will also pay fees.
How Do I File?
You can expect to pay about $300 in filing and administrative fees. This payment may be split into four payments if you cannot afford one lump sum payment.
Upon payment, you will also be required to provide the following information to the court:
- A comprehensive list of your assets and liabilities, including your property.
- A list of your debts and what was purchased with that money.
- An income statement, including the frequency of that income. This is especially important for seasonal operations.
- A comprehensive list of living expenses, including food, shelter, transportation, taxes, utilities, fertilizer, etc.
- Any other financial information the court asks to see.
Married couples may choose to file together or separately. If you choose to file separately, both of you will have to present this information. If there is an instance where only one spouse is filing, the second spouse’s income will be taken into consideration.
What Happens Next?
Although the Chapter 12 process might be overwhelming, below is what you can expect to happen. We recommend working with a local bankruptcy lawyer through the process.
Upon filing for Chapter 12, your debts will be frozen automatically. This is called an automatic stay. Creditors will not be able to call or contact you to ask for payments, nor will they be able to sue you or seek wage garnishes. The court will notify all of the creditors you listed when you filed for Chapter 12.
Your case will have an impartial trustee assigned to oversee the process. This impartial trustee is called the bankruptcy trustee, whose first role is to decide whether your application is approved. If it is, they are there to answer your questions, assign debt repayments, and administer whatever tasks need to be completed.
Meeting of the Creditors
After three to four weeks (21-35 days), there will be a meeting of the creditors. If you and your spouse filed together, you both must be present. At this meeting, a few different things will happen. You will take an oath to tell the truth. Your creditors, as well as your trustee, gather, and you will answer their questions about your finances. You will present your repayment plan to the court and your creditors.
At this point in the process, there is no judge present. You will work with your trustee and creditors to come up with a plan. More often than not, the repayment plan is agreed upon at this meeting. If is very important that you discuss your plan with an attorney before the meeting of the creditors to ensure your plan is legal, accurate, complete, and fair.
After the meeting of the creditors, there is a repayment plan hearing. The courts will approve or deny your plan at this meeting. Interested creditors may attend this meeting. To ensure that your repayment plan is granted, be sure that your plan:
- Repays your debts in three years. An extension is sometimes granted for up to five years, but there has to be an extenuating circumstance.
- All of your domestic claims are still being paid–you cannot pause or miss any child support payments.
- A regular, fixed payment is being made.
Once your plan is agreed upon, there will be a confirmation hearing 45 days later. A judge will review the plan and ensure it is legal and meets all of the requirements under the Bankruptcy Code. Because your plan has already been agreed upon by your trustee and creditors, you do not need to attend this hearing. Since you have already created your plan with Johnson May Law’s help, you can be confident that the judge will give the final stamp of approval.
Creditors will be given 21 days' notice of the hearing, so they can choose to attend or not. They may show up to contest the plan, but it is unlikely since they previously agreed to it. They may argue you are not offering to pay enough each month or that your disposable income is not being utilized enough.
If there are no disputes and the judge approves your plan, you will start making your monthly payments. You will pay your trustee, and the trustee will disperse your payment to your creditors.
If the plan is rejected by the judge, you will draw up a new plan and file again. If you cannot afford the monthly payments or if there are other issues with the plan you cannot overcome, you will need to file Chapter 7 bankruptcy, which will require you to liquidate assets. Again, to avoid this rejection of a plan, be sure to work with Johnson May Law. They are experienced and ready to help.
Chapter 12 Discharge
Once all payments are made, and the debts are gone, your case will be dismissed. Any creditors involved with this case can no longer contact you nor bring new claims against you. Creditors you repaid, in part or in full, can not sue or collect any further payments.
Considerations for Idaho Farmers
Unfortunately, in Idaho, we experienced severe weather this year. Early in 2022, there was a lack of rainfall, and then spring weather lasted further into June than normal. Once the summer heat showed up, it lasted into September. Because of the weather challenges, many farmers planted different crops than they usually do to try and adapt. Further, farmers had to harvest later than usual. All of these challenges may ultimately lead to financial hardships for Idaho farmers.
If you find yourself struggling to cover the cost of your farm’s operations, know that you are not alone. With the harsh and unpredictable weather, many Idaho farmers will be in the same boat as you. Here at Johnson May Law, we are available to help. We have extensive experience assisting hardworking Idaho families through challenging years. We are eternally grateful for the service farmers provide our community and humbly await your call. We will talk you through the process and help you draft an affordable repayment plan, allowing you to keep your farm going. Don’t wait; reach out today!