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What is an agricultural bankruptcy?

Many farmers in Bradley County and in Eastern Tennessee have shied away from filing a petition in bankruptcy. Some have found the liquidation provisions of Chapter 7 too severe for their situation; others have rejected Chapter 11 as too complex and too expensive. Congress acted to eliminate this dilemma in 1986 by adding Chapter 12 to the Bankruptcy Code. This chapter is intended to allow family farmers to reorganize their debts and continue farming without facing dissolution under Chapter 7 or the expense of Chapter 11.

To take advantage of Chapter 12, a person must be "engaged in a farming operation. The farm business must be owned and controlled by the debtor's immediate family. The total amount of debt owed by the farmer cannot exceed $4,153,150, and at least 50% of those debts must be related to the farming operation. More than 50% of the debtor's gross income for the preceding tax year must have come from farming. If the farming business has been incorporated, more than one-half of its outstanding stock must be owned by one family. The family must conduct the business of the farm, and more than 80% of the corporation's assets must be related to farming. The stock of the farming business cannot be publicly traded.

The farmer, much like the debtor in a Chapter 13 proceeding, must provide the court with a list of all creditors and their claims, the source of the debtor's income, a list of the debtor's property and an itemized list of farming and living expenses. As with other forms of bankruptcy, the filing of a Chapter 12 petition automatically stops all collection activity. The farmer is then required to prepare a prepayment plan for review by the creditors. The debts are then separated into three groups, priority, secured and unsecured. Once the court confirms the plan, the debtor is contractually bound to each creditor to make the payments specified in the plan. If the debtor makes all payments required by the plan, the remaining portion of all debts will be discharged.

Chapter 12 is designed to provide a simple form of relief for the farmer and certainty for creditors. Anyone with questions about a Chapter 12 bankruptcy may wish to consult an experienced bankruptcy lawyer for advice.

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