Filing Under Chapter 12: A Lifesaver For Family Farmers & Fishers

Typically when we talk about bankruptcy we are talking about Chapter 7, Chapter 11, or Chapter 13 bankruptcy, but there is another chapter of the bankruptcy code that is important to talk about in a state like Wisconsin where may people farm or fish to support their families. Chapter 12 is a special chapter of the bankruptcy code that was enacted specifically so that “family farmers” and “family fishermen” can file for bankruptcy without losing all their assets and giving up their way of life.

Chapter 12 bankruptcies are like Chapter 11 or Chapter 13 bankruptcies in that the goal is to reorganize operations, and repay debts on a payment plan. However, Chapter 12 is simpler and less expensive to file under than Chapter 11, which was designed with large corporations in mind. But Chapter 12 is also a lot better at dealing with the large debts and less predictable income that characterize family farming and fishing operations than Chapter 13 is.

There are very specific rules governing who qualifies as “family farmers” and “family fishermen.”

If the filer is an individual or a family, they must meet all of the following criteria:

  1. The individual or husband and wife must be engaged in a farming operation or a commercial fishing operation.
  2. The total debts (secured and unsecured) of the operation must not exceed $4,031,575 (if a farming operation) or $1,868,200 (if a commercial fishing operation).
  3. If a family farmer, at least 50%, and if family fisherman at least 80%, of the total debts that are fixed in amount (exclusive of debt for the debtor’s home) must be related to the farming or commercial fishing operation.
  4. More than 50% of the gross income of the individual or the husband and wife for the preceding tax year (or, for family farmers only, for each of the 2nd and 3rd prior tax years) must have come from the farming or commercial fishing operation.

If the filer has structured their operation as a corporation or partnership, they must meet all of these criteria:

  1. More than one-half the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives.
  2. The family or the family and its relatives must conduct the farming or commercial fishing operation.
  3. More than 80% of the value of the corporate or partnership assets must be related to the farming or fishing operation.
  4. The total indebtedness of the corporation or partnership must not exceed $4,031,575 (if a farming operation) or $1,868,200 (if a commercial fishing operation).
  5. At least 50% for a farming operation or 80% for a fishing operation of the corporation’s or partnership’s total debts which are fixed in amount (exclusive of debt for one home occupied by a shareholder) must be related to the farming or fishing operation.
  6. If the corporation issues stock, the stock cannot be publicly traded.

Data from the Administrative Office of the Courts shows there were only 40 Chapter 12 bankruptcies filed in Wisconsin last year out of a total of 17,159 bankruptcies filed, so they are relatively rare. However, one high profile Chapter 12 bankruptcy has been in the news. A farmer down in Geneseo, Illinois has filed for Chapter 12 bankruptcy after the farm’s plan to sell high-quality, all-natural meat failed. Some customers are crying fraud, and the Illinois Attorney General has gotten involved, so we are keeping an eye on this case to see if it will impact the law governing Chapter 12 bankruptcies.

Milwaukee Once Again Leads Wisconsin In Bankruptcies

The Administrative Office of the U.S. Courts has just released its data on the number of bankruptcies filed during 2016, and once again Milwaukee leads the state in the number of bankruptcies filed.

17,159 bankruptcies were filed in Wisconsin during 2016, and 6,827 of those were filed in Milwaukee County. It is not surprising that Milwaukee County leads the state in the number of bankruptcies filed since it is also the most populous county in the state, but the number of bankruptcies filed there is still disproportionally high.

As a comparison, consider the number of bankruptcies filed in nearby counties:

Racine – 736

Ozaukee – 147

Waukesha – 856

Sheboygan – 242

A closer look at the Milwaukee bankruptcies reveals that 6,773 of the county’s 6,827 bankruptcies are non-business bankruptcies, meaning they are being filed by individuals or families. This suggests that people in the area are still really struggling to make ends meet despite the fact that the economists stay we are no longer in a recession.

If there is a silver lining to this dark cloud, it is the overall drop in the number of bankruptcies filed in 2016 compared to 2015. This trend carries through Milwaukee County, Wisconsin, and the nation as a whole.

In 2015, there were 7,630 bankruptcies filed in Milwaukee County. In 2016, that number fell to 6,827.

18,793 bankruptcies were filed in Wisconsin in 2015. In 2016, that number fell to 17,159.

Across the country, 794,960 bankruptcies were filed, down from the 844,495 bankruptcy cases filed in the previous year. This is a 5.9 percent drop in filings overall.

According to the Administrative Office of the Courts, this is the lowest number of bankruptcy filings for any calendar year since 2006, and the sixth consecutive calendar year that filings have fallen. However, 2016 was the first calendar year since 2011 that the rate of annual decline was less than 10 percent.

As we attempt to draw conclusions about what this data means, it is important to remember that bankruptcy as a concept is a mixed bag. Having a large number of people file for bankruptcy is not good since it means people and businesses are struggling in the grand scheme of things. But on a more micro level, filing for bankruptcy is like hitting the do-over button. Wiping away old debts and putting people and businesses on a stronger financial foundation so that they can have a second chance to create a good life for their family or start a new business is a good thing.