Wednesday, October 30, 2013

What is a Chapter 12 bankruptcy and do I qualify?

          Chapter 12 of the Bankruptcy Code is designed to protect family farmers and fisherman.  Southern California has plenty of both.  Still, this is a very uncommon form of bankruptcy.

          An individual or married couple who farm can file Chapter 12, but so can a farm corporation, LLC or partnership. There are some requirements to file a successful Chapter 12. You must have regular annual income, your debts cannot exceed $4,031,575 (adjusted yearly), and over 50% of your debts must have been related to the farming operation. In addition, if you are an individual or couple, over 50% of your gross income must come from farming operations.

          Farm Bankruptcy was first added to the Bankruptcy Code in 1986. In the 1980’s, there were many bank failures, and credit all but dried up for farmers. The result was a farm crisis. Chapter 12 Farm Bankruptcy was supposed to be a temporary emergency response, but was periodically extended. In 2005 when Congress passed a major overhaul of the Bankruptcy Code, making it harder and more expensive for consumers to file for bankruptcy, they actually strengthened Chapter 12 and made it permanent.

          The most powerful tool found in a Chapter 12 is the ability to re-do, or modify any secured debt. This includes mortgages and loans on livestock, crops and equipment. All aspects of the loans can be modified into what is effectively a new loan. The interest rate can be lowered. The principal balance can be decreased down to the value of the collateral. The term of the loan can be increased. Any arrears will disappear into the new modified loan.

          This ability to modify ANY secured loan in Chapter 12 is one of the major advantages of Chapter 12 over Chapter 13. Others include: There is no required “means test” in a Chapter 12; you do not have to get a Court Order extending the automatic stay beyond 30 days if you were in a previous Chapter 12; The eligibility limits are greater than in a Chapter 13.

          Family farmers in America are a dying breed. The continued access farmers have to Chapter 12 bankruptcy has allowed many farms to get through tough economic times and continue their family farm business and way of life.

          If you feel you may qualify for this powerful and effective bankruptcy, call us for a free consultation.  The call just might “save the farm”.

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