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Who Can File for Chapter 12 Bankruptcy?

Most people are familiar with Chapter 7 and Chapter 13 bankruptcy. Chapter 12 is a special type of bankruptcy clause that allows a specific group of financially “distressed” debtors to file for bankruptcy.

Unlike Chapters 7, 11, or 13 bankruptcies, which most individuals or businesses in debt can apply for, Chapter 12 bankruptcy is specifically reserved for family farmers or family fishermen under the Bankruptcy Code, which the state of Arizona adheres to. The eligible parties can propose a repayment plan for the debt to pay off creditors in five years or less. In this sense, Chapter 12 bankruptcy is similar to Chapter 13.

Chapter 12 doesn’t allow for the automatic discharge of some debts like Chapter 7. However, a judge will review all debts and determine if any are eligible for a legal discharge. Let’s look at who is eligible to file for this type of bankruptcy:

Only Fishermen and Farmers with Regular Income are Eligible

The Bankruptcy Code specifically states that the fishermen or farmers who qualify for Chapter 12 bankruptcy must have what is termed as “regular annual income.” This clause exists because debtors who file a petition must agree to a repayment plan that requires some sort of income. However, income for some farmers and fishermen is almost always seasonal. The law takes this into consideration and does allow relief if needed. You will need a competent bankruptcy attorney in Phoenix or in your local area to ask for a regular income reprieve.

Categories of Farmers and Fishermen

The family farmers and fishermen are specified in the law under several categories. A “family farmer” or a “family fisherman” could be an individual or a spouse of en eligible individual, or a business entity like a partnership. The individuals must have a professional in commercial fishing or farming to be eligible. The total debt the petitioner is seeking relief from should not exceed $3,237,000 for farmers or $1,500,000 for fishermen.

A majority of the debt in question should be related to farming or fishing. For fishermen, this is least 80 percent, and for farmers, the threshold is at least 50 percent. Also, a majority of more than 50 percent of the income of the petitioner must come from farming for fishing operations for the preceding tax year. For farmers, this must be true for two or three preceding tax years.

Filing as a Corporation

Fishing and farming corporations or partnerships are eligible for Chapter 12 bankruptcy too. There are, however, stringent considerations that determine which types of business entities are eligible. The businesses must be family owned, and more than one-half of the equity or stock in the business must be owned by a single family or its blood relatives.

The corporation or the partnership must be run by family members and relatives. A majority of 80 percent or more of the value of the entity must come from farming or fishing related activities. There are limits to indebtedness levels as well just like for individuals. Also, the business cannot publicly trade stocks after filing for bankruptcy.

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