Chapter 12 of the Bankruptcy Code is a little-known avenue of debt relief and reorganization for family farmers and fishermen. Like its better-known cousins, Chapter 13 and Chapter 11, Chapter 12 is a court-supervised debt reorganization. However, in a few important ways Chapter 12 is the most powerful form of bankruptcy. Simply put, when the bankruptcy laws were amended, farmers and fishermen were favored, and many of the requirements of the other chapters were not made applicable to Chapter 12. You must qualify, but if you do and need debt relief, Chapter 12 warrants investigation.
For fishing operations owned by private corporations, partnerships or LLCs, the business must be 50-percent owned by one family who actually conducts the fishing operations. At least 80 percent of the assets of the business must be related to the fishing operation. The business must have less than $1,757,475 in aggregate debts (excluding debt on one home for an owner), and at least 80 percent of these debts must arise out of the fishing business.
For individuals (i.e. non-corporate owned fishing operations), the requirements are similar. The same debt limit applies, but there is no asset test. Instead, at least 50 percent of the individual’s gross income must come from the fishing business in the year preceding the bankruptcy or, alternatively, at least 50 percent of gross income in each of the two years before that.
So why does it matter? What is so good about Chapter 12?
If you qualify, Chapter 12 allows a family fisherman or fishing operation to reorganize and discharge debts, stop foreclosures, seizures, and lawsuits–just like some other chapters of bankruptcy. However, there is one special privilege under Chapter 12: the ability to forcibly re-write a home mortgage on an underwater home. This can provide dramatic relief and cannot be done in any other chapter of bankruptcy, and in this real estate market could have huge advantages for those who qualify. For example, a fishermen with a home worth $250,000 encumbered by $350,000 in mortgage debt could modify the mortgage balance to $250,000 and repay this on a normal 30-year mortgage term at a market interest rate.
There is also no means test in Chapter 12 or prohibition on seasonal or balloon plan payments. Although you will need some predictability of income in order to create and fund a feasible reorganization plan, the relaxed requirements of Chapter 12 make a fisherman bankruptcy more flexible and potentially more beneficial and likely to succeed.
The bottom line is that if you are a family fisherman struggling to pay debts or a home mortgage, it makes sense to investigate your options under Chapter 12.