Chapter 12 Definition | Bankrate.com

Deeper definition

Chapter 12 bankruptcy doesn’t automatically wipe out all of your debts. Instead, you must file a repayment plan, similar to Chapter 13 bankruptcy. Both an individual and an individual and spouse can apply for bankruptcy protection under Chapter 12, but the bulk of their debts must be related to their farming or fishing business.

This includes debts that have a fixed amount but excludes the filer’s home. For a family farmer, at least 50 percent of the debts must be related to the business, and for a fisherman, at least 80 percent must be.

Also, at least 50 percent of their income must have come from the business for the previous tax year. For family farmers this includes the three previous tax years. They must have regular annual income so that they have the financial resources to make a long-term plan to repay their creditors over 3 to 5 years.

As with other types of bankruptcy, anyone filing Chapter 12 must first file a petition with the court that serves their area, along with the required documentation and paperwork.

This includes disclosing their assets and their liabilities, their income and expenses, and a statement of their financial affairs. They must provide detailed lists of all income as well as all business and living expenses, and a detailed list of all property as well as a list of every creditor and the amounts owed.

Chapter 12 example

You run a family farming business and have had to replace several pieces of expensive equipment over the past couple of years. There also has been a drought that harmed your crops so that you produced less product to sell.

You’re not only earning less money but also spending more because of business-related expenses. If at least 50 percent of your debt is related to running your business, you can apply for Chapter 12 bankruptcy and create a 3- to 5-year plan to help you pay your creditors while also allowing your financial situation to recover.