Family Farmer Reorganization|
1. Restructuring the Family Farm
Chapter 12 bankruptcy is a special section of the Bankruptcy
Code that provides for the restructuring of the debts of a family farm or family
fisherman’s business. It provides powerful tools to debtors, sometimes enabling
them to reduce their debts or restructure their payments so that they can
continue farming or fishing as their livelihood. Chapter 12 was first created in
October 1986 and was recently made permanent by The Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 (the 2005 Bankruptcy Act). Chapter 12
has been an important tool for farmers in financial distress, both as a
bankruptcy option and as a base line for negotiations outside of bankruptcy.
2. Who is eligible for Chapter 12?
For a farmer or a farm business to be eligible for Chapter 12
relief, the farmer or the farm business must be “engaged in a farming operation”
and must meet other specific eligibility requirements. These requirements
consider the amount of debt, the percentage of the debt that comes from the
farming operation, and the percentage of income that comes from the farming
operation. For farm businesses, family ownership and control is also required.
An individual or a married couple that engage in a farming
operation are eligible for Chapter 12 relief if they meet each of the
following specific eligibility requirements:
The farmer’s total amount of debt cannot be greater than $3,237,000.
This limit will increase in future years
At least fifty percent (50%) of
the debt must come from the farming operation.
The farmer must meet a gross
income from farming test. More than fifty percent of the gross income for
the taxable year before the year that the bankruptcy is filed must be from
A corporation or partnership
that engages in a farming operation can also be eligible for Chapter 12
restructuring if more than 50% of the outstanding stock or equity in the
partnership is held by one family
This family or their relatives
must conduct the farming operation.
The debts of the corporation
or partnership must not exceed $3,237,000
More than 80 % of the value
of the corporation or partnership must be related to the farming
3. How does Chapter 12 work?
Chapter 12 provides many alternatives for reorganizing family
farm debts. In many cases, it allows a debtor to reduce a mortgage to the
current value of the property and to greatly reduce unsecured obligations. In
order to accomplish this type of restructuring, Chapter 12 provides an orderly
framework of reorganization. A Chapter 12 bankruptcy begins when the debtor
files a Chapter 12 petition with the clerk of the Bankruptcy Court.
Within 90 days of filing the
bankruptcy, the Chapter 12 debtor is required to submit a reorganization plan to
the bankruptcy court.31 The creditors do not need to approve of this plan; the
creditors will not have an opportunity to vote on the plan. The debtor,
however, will have to obtain court approval or “confirmation” of the plan.
The confirmation process is the process by which the debtor presents the plan to
the court and defends the plan against objections that may be raised by
creditors. In order for a plan to be confirmed, it must meet the specific
confirmation requirements set forth in Chapter 12.
John Ellsworth has been working with
and helping farmers since 1972 when he first opened his law practice in Pike
County, Illinois (self-proclaimed "Pork Capital of the World").
John began with a tax and
bankruptcy practice specifically to help farmers with tax and bankruptcy issues.
The practice has now grown to a two-state practice, including both Illinois and
Wisconsin. Both states are where John Ellsworth is licensed to practice
law. John is admitted to all three bankruptcy courts in Illinois--the
Southern District, the Central District and the Northern District, and both
bankruptcy courts in Wisconsin, the Western District and the Eastern District.
He can practice law in all federal and bankruptcy and state courts in Illinois
If you or someone you know is
considering filing bankruptcy and "getting out of farming," please be sure to direct them
to this webpage where they might decide to call John Ellsworth first and have a
free phone consultation. Our toll-free number is 312-608-2772
Many attorneys do not file Chapter 11 and Chapter 12 cases.
Here is where John Ellsworth Law Group can provide you with much-needed experience and help.
If you have any questions regarding our services, please contact us by calling or e-mailing us and
we'll get right back to you. We look forward to hearing from you.
Contact us for more info:
115 S. LaSalle Street - Suite 2600, Chicago IL 60603