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Do I Qualify for Chapter 12 Bankruptcy, and How Does it Work?

On Behalf of | Feb 15, 2022 | Bankruptcy

Many people and families in Iowa make a living through farming and other agricultural work. However, the financial pressures on individual and family farms have greatly increased in recent years. Some of these effects include commodity prices staying low and weather patterns becoming less predictable. These sustained negative effects led to a surge in bankruptcies among small farms.

There are several different ways to file for bankruptcy. The different types of bankruptcy are known as “Chapters” due to which section of the federal bankruptcy code to which they refer. Still, Chapter 12 bankruptcy was designed specifically with smaller farms in mind.

Several provisions aren’t available if you file under a different chapter as compared to filing under Chapter 12 bankruptcy. This does not mean Chapter 12 is always the right option for farmers in financial distress. However, it can be an attractive alternative to other types of bankruptcy. Keep reading to learn more or contact the Iowa bankruptcy attorneys at Telpner Peterson Law Firm, LLP for more information.

What Is Chapter 12 Bankruptcy?

The different types of bankruptcy can be broken down into two categories: liquidation bankruptcies and reorganization bankruptcies.

In a liquidation bankruptcy, such as under Chapter 7, the party filing for bankruptcy must sell (or “liquidate”) most or all of their non-exempt assets to pay back as much of their debts as possible. Once all the assets have been liquidated, the filer’s remaining eligible debts are discharged.

The process is much different in a reorganization bankruptcy. Instead of having to sell all your assets, you get to keep most of them while you work with your creditors to come up with a repayment plan. If a bankruptcy judge approves your repayment plan, you’ll start making payments. Once you’ve completed the terms of your repayment plan, any of your remaining eligible debts are wiped out.

There are two aspects of Chapter 12 bankruptcy that make it especially appealing to smaller farms. The first is that Chapter 12 bankruptcy is a reorganization bankruptcy. You won’t have to liquidate your assets. The second is that Chapter 12 was designed specifically with farms and small fishing operations in mind.

Some of the provisions found in Chapter 12 that are not available in other types of bankruptcy include:

  • Eligible farmers are allowed to consider past income, production expenses, and future financial needs to come up with a practical repayment plan.
  • Eligible farmers can sell certain assets to repay their debts even if there’s a lien on the assets.
  • Tax claims from the sale of any assets are treated as unsecured debts under Chapter 12, meaning they do not necessarily have to be paid back in full. This is not the case with Chapter 11 or Chapter 13 bankruptcies.
  • Chapter 12 allows eligible farmers to modify secured loans through a process called “cramdown.” In this case, the farmer pays the present value of a property instead of the remaining balance of the debt. This is not an option in Chapter 11 or Chapter 13 bankruptcies.

What Is the Four-Part Test?

To qualify for Chapter 12 bankruptcy, family farmers must meet four specific conditions, which are:

  • You must be engaged in a “farming operation”
  • Your total debts cannot exceed $10 million
  • At least 50 percent of your debts must be related to your farming operation
  • More than 50 percent of your income in the prior tax year must have come from farming

How Could a Bankruptcy Lawyer Help Me?

A bankruptcy attorney can help by looking at your debts and other factors to determine if Chapter 12 bankruptcy is right for you. For example, chapter 12 may not be the best option for your situation if you have massive debts and no realistic way to repay them. In this case, a Chapter 7 bankruptcy may be a better option.

Additionally, a lawyer can help you prepare your Chapter 12 bankruptcy petition and make sure everything is in order. You’ll want to be sure you have the necessary financial information showing you’re eligible for Chapter 12 bankruptcy. Any mistakes or other issues could result in your petition being denied.

Finally, a bankruptcy lawyer can walk you through the process and help stave off your creditors. There will likely be several court hearings as your case progresses. Your creditors will have a chance to argue for more money or that your petition should be denied. A bankruptcy lawyer can help you fight back against your creditors and create a repayment plan that’s realistic and within your means.

Contact Telpner Peterson Law Firm, LLP

At Telpner Peterson Law Firm, LLP, we know circumstances can be difficult for farmers in Iowa. We want to help however we can to ensure the best decision for your financial future. Bankruptcy can be intimidating, but our Council Bluffs bankruptcy lawyers will work with you to make the process as quick, easy, and painless as possible. Contact our office today to set up a consultation.