Farm Bankruptcy Relief – Would You Qualify for Chapter 12?

28 Aug Farm Bankruptcy Relief – Would You Qualify for Chapter 12?

Chapter 12 bankruptcy is debt relief for family farmers. It allows these farmers to reorganize their debts and save their farms and their way of life. But who qualifies as a “family farmer”?

The bankruptcy code gives some guidelines, but does not always make it clear. Large agri-businesses do not qualify for Chapter 12. A family that grows a small vegetable garden in their back yard probably does not qualify. Among other factors, a family farmer is one who gets at least 50 percent of their gross income from their farming operation. But what does that mean?

Several cases in the past year have helped to define who qualifies for a farm bankruptcy. A court in the Central District of California determined that if a debtor’s farm income was less than their Social Security plus their military benefits they were NOT qualified as a “family farmer”. This result seems strange in light of the fact that many bankruptcy courts do not consider Social Security income as countable income for purposes of the “means test” and other factors.

An Oregon court determined that a debtor who engaged in the purchase and resale of Christmas trees was not a “farming operation” and did not qualify for Chapter 12.

Courts in both Oregon and West Virginia determined that raising horses is a farming operation, but that training and boarding horses is not.

A South Carolina court ruled that it is gross farm income, not net loss on a debtor’s tax return that determines if a farm qualifies as a family farm. The same court also held that if the farm was operated as an LLC, and the debtor got paid a salary from the LLC, the individual’s income would be included for the purpose of determining if they qualified as a family farmer.

Courts favor the “totality of the circumstances test” in determining if a debtor is a family farmer. The factors they consider include:

1. The location of the operation
2. The nature of the enterprise
3. The type of product and its eventual market
4. The physical presence or absence of family members at the property
5. Ownership of traditional farm assets
6. Whether the owners are engaged in the process of growing or developing crops or livestock
7. Whether the operation is subject to the inherent risks of farming.

Generally, courts treat the “inherent risk of farming” factor as the most important.

Many courts have examined the question of whether or not a debtor qualified to get Chapter 12 relief with a variety of results. I have filed farm bankruptcy cases for dairy farmers, timber growers, greenhouses and even a butterfly farm. In one of my recent cases, the judge held that even though my client may not have been physically engaged in farming at the time she filed her Chapter 12 petition, it was her intention to return to farming that was controlling.

Of all of the types of bankruptcy relief available, in many ways Chapter 12 farm bankruptcy relief is the most complete and effective relief offered.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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