Can A Farmland Foreclosure Be Stopped by Filing Chapter 12 Bankruptcy?

Chapter 12 bankruptcies were designed to handle the farm financial crisis that occurred in the 1980s. Prior to that time, farm bankruptcy was relatively unheard of because they were few. In the 1980s, they became very common and a new law provisioning for Chapter 12 bankruptcy was written. It is exclusive to family farmers who go broke.

For family farmers that qualify, Chapter 12 serves as a reorganizational bankruptcy similar to that of Chapter 11 for businesses and Chapter 13 for regular wage-earners. It is allows the family farmer to attempt to dodge liquidation and continue his or her businesses.

Two main types of bankruptcy available to farmers are liquidation bankruptcy (chapter 7) and reorganization bankruptcy (chapter 12). If the 80% or more of the family’s gross income comes from farming, that family is eligible and able to file a chapter 12 reorganizational bankruptcy. If less than 80% of the family’s total income is derived from farming, normal rules apply and that family can be forced into a chapter 7 bankruptcy by its creditors the same as any other debtor.

By filing in federal bankruptcy court, an automatic stay occurs. All creditors are immediately forbidden from pursuing any debt collection activities, including foreclosure. This stay is the primary and most important consumer protection feature of bankruptcy law.

In order to be eligible for this protection, a family farmer must not have debt exceeding the permissible debt limit of $3.27 million. At least 50% of that debt must have risen from farming operations. In 2005, laws were passed that made it easier for stressed family farmers to qualify for bankruptcy relief. With the current state of the economy, it is likely that similar measures may be passed again, so it is important to watch your state and federal laws on bankruptcy for updates and changes.

This stay is maintained throughout the proceedings, until the debt is reorganized into a manageable form for the farmer and his family. Through filing a chapter 12 bankruptcy, even the day of a foreclosure sale, an eligible family farmer can retain his business and livelihood, potentially for years and years to come.