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Chapter 12
Family Farmer or Family Fisherman Bankruptcy
The chapter of the Bankruptcy Code providing for adjustment of debts of a "family
farmer," or a "family fisherman" as those terms are defined in the Bankruptcy Code.
Background
Chapter 12 is designed for "family farmers" or "family fishermen" with "regular annual
income." It enables financially distressed family farmers and fishermen to propose and
carry out a plan to repay all or part of their debts. Under chapter 12, debtors propose a
repayment plan to make installments to creditors over three to five years. Generally, the
plan must provide for payments over three years unless the court approves a longer
period "for cause." But unless the plan proposes to pay 100% of domestic support
claims (i.e., child support and alimony) if any exist, it must be for five years and must
include all of the debtor's disposable income. In no case may a plan provide for
payments over a period longer than five years. 11 U.S.C. § 1222(b)-(c).
In tailoring bankruptcy law to meet the economic realities of family farming and the
family fisherman, chapter 12 eliminates many of the barriers such debtors would face if
seeking to reorganize under either chapter 11 or 13 of the Bankruptcy Code. For
example, chapter 12 is more streamlined, less complicated, and less expensive than
chapter 11, which is better suited to large corporate reorganizations. In addition, few
family farmers or fishermen find chapter 13 to be advantageous because it is designed
for wage earners who have smaller debts than those facing family farmers. In chapter
12, Congress sought to combine the features of the Bankruptcy Code which can provide
a framework for successful family farmer and fisherman reorganizations.
The Bankruptcy Code provides that only a family farmer or family fisherman with "regular
annual income" may file a petition for relief under chapter 12. 11 U.S.C. §§ 101(18), 101
(19A), 109(f). The purpose of this requirement is to ensure that the debtor's annual
income is sufficiently stable and regular to permit the debtor to make payments under a
chapter 12 plan. But chapter 12 makes allowance for situations in which family farmers
or fishermen have income that is seasonal in nature. Relief under chapter 12 is
voluntary, and only the debtor may file a petition under the chapter.
Under the Bankruptcy Code, "family farmers" and "family fishermen" fall into two
categories: (1) an individual or individual and spouse and (2) a corporation or
partnership. Farmers or fishermen falling into the first category must meet each of the
following four criteria as of the date the petition is filed in order to qualify for relief under
chapter 12:
In order for a corporation or partnership to fall within the second category of debtors
eligible to file as family farmers or family fishermen, the corporation or partnership must
meet each of the following criteria as of the date of the filing of the petition:
A debtor cannot file under chapter 12 (or any other chapter) if during the preceding 180
days a prior bankruptcy petition was dismissed due to the debtor's willful failure to
appear before the court or comply with orders of the court or was voluntarily dismissed
after creditors sought relief from the bankruptcy court to recover property upon which
they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a
debtor under chapter 12 or any chapter of the Bankruptcy Code unless he or she has,
within 180 days before filing, received credit counseling from an approved credit
counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy
administrator) (1) has determined that there are insufficient approved agencies to
provide the required counseling. If a debt management plan is developed during
required credit counseling, it must be filed with the court.
How Chapter 12 Works
A chapter 12 case begins by filing a petition with the bankruptcy court serving the area
where the individual lives or where the corporation or partnership debtor has its
principal place of business or principal assets. Unless the court orders otherwise, the
debtor also shall file with the court (1) schedules of assets and liabilities, (2) a
schedule of current income and expenditures, (3) a schedule of executory contracts and
unexpired leases, and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). A
husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a).
(The Official Forms may be purchased at legal stationery stores or downloaded from
the Internet at www.uscourts.gov/bkforms/index.html. They are not available from the
court.)
As of October 17, 2005, the courts must charge a $200 case filing fee and a $39
miscellaneous administrative fee. Normally the fees should be paid to the clerk of the
court upon filing. With the court's permission, however, they may be paid in
installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court
Miscellaneous Fee Schedule, Item 8. The number of such installments is limited to four
and the debtor must make the final installment no later than 120 days after filing the
petition. Fed. R. Bankr. P. 1006(b). For cause shown, the court may extend the time of
any installment, provided that the last installment is paid not later than 180 days after
the filing of the petition. Id. The debtor may also pay the $39 administrative fee in
installments. If a joint petition is filed, only one filing fee and one administrative fee are
charged. Debtors should be aware that failure to pay these fees may result in dismissal
of the case. 11 U.S.C. § 1208(c)(2).
In order to complete the Official Bankruptcy Forms which make up the petition,
statement of financial affairs, and schedules, the debtor will need to compile the
following information:
Married individuals must gather this information for each spouse regardless of whether
they are filing a joint petition, separate individual petitions, or even if only one spouse is
filing. In a situation where only one spouse files, the income and expenses of the non-
filing spouse is required so that the court, the trustee, and the creditors can evaluate the
household's financial position.
When a chapter 12 petition is filed, an impartial trustee is appointed to administer the
case. 11 U.S.C. § 1202. In some districts, the U.S. trustee appoints a standing trustee
to serve in all chapter 12 cases. 28 U.S.C. § 586(b). As in chapter 13, the trustee both
evaluates the case and serves as a disbursing agent, collecting payments from the
debtor and making distributions to creditors. 11 U.S.C. § 1202.
Filing the petition under chapter 12 "automatically stays" (stops) most collection actions
against the debtor or the debtor's property. 11 U.S.C. § 362. Filing the petition does not,
however, stay certain types of actions listed under 11 U.S.C. § 362(b). The stay arises
by operation of law and requires no judicial action. As long as the stay is in effect,
creditors generally cannot initiate or continue any lawsuits, wage garnishments, or even
telephone calls demanding payments. The bankruptcy clerk gives notice of the
bankruptcy case to all creditors whose names and addresses are provided by the
debtor.
Chapter 12 also contains a special automatic stay provision that protects co-debtors.
Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a
"consumer debt" from any individual who is liable with the debtor. 11 U.S.C. § 1201(a).
Consumer debts are those incurred by an individual primarily for a personal, family, or
household purpose. 11 U.S.C. § 101(8).
Between 20 to 35 days after the petition is filed, the chapter 12 trustee will hold a
"meeting of creditors." If the U.S. trustee or bankruptcy administrator schedules the
meeting at a place that does not have regular U.S. trustee or bankruptcy administrator
staffing, the meeting may be held no more than 60 days after the debtor files. During the
meeting the trustee puts the debtor under oath and both the trustee and creditors may
ask questions. The debtor must attend the meeting and answer questions regarding
the debtor's financial affairs and the proposed terms of the debtor's repayment plan. 11
U.S.C. § 343; Fed. R. Bankr. P. 4002. If a husband and wife have filed a joint petition,
they both must attend the creditors' meeting. In order to preserve their independent
judgment, bankruptcy judges are prohibited from attending. 11 U.S.C. § 341(c). The
parties typically resolve problems with the plan either during or shortly after the
creditors' meeting. Generally, the debtor can avoid problems by making sure that the
petition and plan are complete and accurate, and by consulting with the trustee prior to
the meeting.
In a chapter 12 case, to participate in distributions from the bankruptcy estate,
unsecured creditors must file their claims with the court within 90 days after the first
date set for the meeting of creditors. Fed. R. Bankr. P. 3002(c). A governmental unit,
however, has 180 days from the date the case is filed file a proof of claim. 11 U.S.C. §
502(b)(9).
After the meeting of creditors, the debtor, the chapter 12 trustee, and interested creditors
will attend a hearing on confirmation of the debtor's chapter 12 repayment plan.
The Chapter 12 Plan and Confirmation Hearing
Unless the court grants an extension, the debtor must file a plan of repayment with the
petition or within 90 days after filing the petition. 11 U.S.C. § 1221. The plan, which must
be submitted to the court for approval, provides for payments of fixed amounts to the
trustee on a regular basis. The trustee then distributes the funds to creditors according
to the terms of the plan, which typically offers creditors less than full payment on their
claims.
There are three types of claims: priority, secured, and unsecured. Priority claims are
those granted special status by the bankruptcy law, such as most taxes and the costs of
bankruptcy proceeding. (2) Secured claims are those for which the creditor has the right
to liquidate certain property if the debtor does not pay the underlying debt. In contrast to
secured claims, unsecured claims are generally those for which the creditor has no
special rights to collect against particular property owned by the debtor.
A chapter 12 plan usually lasts three to five years. It must provide for full payment of all
priority claims, unless a priority creditor agrees to different treatment of the claim or, in
the case of a domestic support obligation, unless the debtor contributes all "disposable
income" - discussed below - to a five-year plan. 11 U.S.C. § 1222(a)(2), (4).
Secured creditors must be paid at least as much as the value of the collateral pledged
for the debt. One of the features of Chapter 12 is that payments to secured creditors can
sometimes continue longer than the three-to-five-year period of the plan. For example, if
the debtor's underlying debt obligation was scheduled to be paid over more than five
years (i.e., an equipment loan or a mortgage), the debtor may be able to pay the loan off
over the original loan repayment schedule as long as any arrearage is made up during
the plan.
The plan does not have to pay unsecured claims in full, as long as it commits all of the
debtor's projected "disposable income" (or property of equivalent value) to plan
payments over a 3 to 5 year period ,and as long as the unsecured creditors are to
receive at least as much as they would receive if the debtor's nonexempt assets were
liquidated under chapter 7. 11 U.S.C. § 1225. "Disposable income" is defined as
income not reasonably necessary for the maintenance or support of the debtor or
dependents or for making payments needed to continue, preserve, and operate the
debtor's business. 11 U.S.C. § 1225(b)(2).
Within 45 days after filing the plan, the presiding bankruptcy judge decides at a
"confirmation hearing" whether the plan is feasible and meets the standards for
confirmation under the Bankruptcy Code. 11 U.S.C. §§ 1224, 1225. Creditors, who
receive 20 days' notice, may appear at the hearing and object to confirmation. Fed. R.
Bankr. P. 2002(a)(8). While a variety of objections may be made, the typical arguments
are that payments offered under the plan are less than creditors would receive if the
debtor's assets were liquidated, or that the plan does not commit all of the debtor's
disposable income for the three-to-five-year period of the plan.
If the court confirms the plan, the chapter 12 trustee will distribute funds received in
accordance with the terms of the plan.11 U.S.C. § 1226(a). If the court does not confirm
the plan, the debtor may file a modified plan. 11 U.S.C. § 1223. The debtor may also
convert the case to a liquidation under chapter 7. (3) 11 U.S.C. § 1208(a). If the debtor
fails to confirm a plan and the case is dismissed, the court may authorize the trustee to
keep some of the funds for costs, but the trustee must return all remaining funds to the
debtor (other than funds already disbursed to creditors). 11 U.S.C. § 1226(a).
On occasion, changed circumstances will affect the debtor's ability to make plan
payments. A creditor may object or threaten to object to a plan, or the debtor may
inadvertently have failed to list all creditors. In such instances, the plan may be modified
either before or after confirmation. 11 U.S.C. §§ 1223, 1229. Modification after
confirmation is not limited to an initiative by the debtor, but may also be made at the
request of the trustee or an unsecured creditor.11 U.S.C. § 1229(a).
Making the Plan Work
The provisions of a confirmed plan bind the debtor and each creditor. 11 U.S.C. § 1227.
Once the court confirms the plan, the debtor must make the plan succeed. The debtor
must make regular payments to the trustee, which will require adjustment to living on a
fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles
the debtor to retain property as long as payments are made, the debtor may not incur
any significant new debt without consulting the trustee, because additional debt may
compromise the debtor's ability to complete the plan.11 U.S.C. §§ 1222(a)(1), 1227. In
any event, failure to make the plan payments may result in dismissal of the case. 11 U.
S.C. § 1208(c). In addition, the court may dismiss the case or convert the case to a
liquidation case under chapter 7 of the Bankruptcy Code upon a showing that the debtor
has committed fraud in connection with the case. 11 U.S.C. § 1208(d).
The Chapter 12 Discharge
The debtor will receive a discharge after completing all payments under the chapter 12
plan as long as the debtor certifies (if applicable) that all domestic support obligations
that came due before making such certification have been paid. The discharge has the
effect of releasing the debtor from all debts provided for by the plan allowed under
section 503 or disallowed under section 502, with limited exceptions. Those creditors
who were provided for in full or in part under the plan may no longer initiate or continue
any legal or other action against the debtor to collect the discharged obligations.
Certain categories of debts are not discharged in chapter 12 proceedings. 11 U.S.C. §
1228(a). Those categories include debts for alimony and child support; money obtained
through filing false financial statements; debts for willful and malicious injury to person
or property; debts for death or personal injury caused by the debtor's operation of a
motor vehicle while the debtor was intoxicated; and debts from fraud or defalcation
while acting in a fiduciary capacity, embezzlement or larceny. The bankruptcy law
regarding the scope of a chapter 12 discharge is complex, however, and debtors
should consult competent legal counsel in this regard prior to filing. Those debts which
will not be discharged should be paid in full under a plan. With respect to secured
obligations, those debts may be paid beyond the end of the plan payment period and,
accordingly, are not discharged.
Chapter 12 Hardship Discharge
The court may grant a "hardship discharge" to a chapter 12 debtor even though the
debtor has failed to complete plan payments. 11 U.S.C. § 1228(b). Generally, a
hardship discharge is available only to a debtor whose failure to complete plan
payments is due to circumstances beyond the debtor's control and through no fault of
the debtor. Creditors must have received at least as much as they would have received
in a chapter 7 liquidation case, and the debtor must be unable to modify the plan. For
example, injury or illness that precludes employment sufficient to fund even a modified
plan may serve as the basis for a hardship discharge. The hardship discharge does
not apply to any debts that are nondischargeable in a chapter 7 case. 11 U.S.C. § 523.
________________________________________
NOTES
1. In North Carolina and Alabama, bankruptcy administrators perform similar functions
that U.S. trustees perform in the remaining forty-eight states. The bankruptcy
administrator program is administered by the Administrative Office of the United States
Courts, while the U.S. trustee program is administered by the Department of Justice.
For purposes of this publication, references to U.S. trustees are also applicable to
bankruptcy administrators.
2. Section 507 sets forth 10 categories of unsecured claims which Congress has, for
public policy reasons, given priority of distribution over other unsecured claims.
3. A fee of $15 is charged for converting a case under chapter 12 to a case under
chapter 7.
The chapter of the Bankruptcy Code providing for adjustment of debts of a "family
farmer," or a "family fisherman" as those terms are defined in the Bankruptcy Code.
- a. How Chapter 12 Works
b. The Chapter 12 Plan and Confirmation Hearing
c. Making the Plan Work
d. The Chapter 12 Discharge
e. Chapter 12 Hardship Discharge
Background
Chapter 12 is designed for "family farmers" or "family fishermen" with "regular annual
income." It enables financially distressed family farmers and fishermen to propose and
carry out a plan to repay all or part of their debts. Under chapter 12, debtors propose a
repayment plan to make installments to creditors over three to five years. Generally, the
plan must provide for payments over three years unless the court approves a longer
period "for cause." But unless the plan proposes to pay 100% of domestic support
claims (i.e., child support and alimony) if any exist, it must be for five years and must
include all of the debtor's disposable income. In no case may a plan provide for
payments over a period longer than five years. 11 U.S.C. § 1222(b)-(c).
In tailoring bankruptcy law to meet the economic realities of family farming and the
family fisherman, chapter 12 eliminates many of the barriers such debtors would face if
seeking to reorganize under either chapter 11 or 13 of the Bankruptcy Code. For
example, chapter 12 is more streamlined, less complicated, and less expensive than
chapter 11, which is better suited to large corporate reorganizations. In addition, few
family farmers or fishermen find chapter 13 to be advantageous because it is designed
for wage earners who have smaller debts than those facing family farmers. In chapter
12, Congress sought to combine the features of the Bankruptcy Code which can provide
a framework for successful family farmer and fisherman reorganizations.
The Bankruptcy Code provides that only a family farmer or family fisherman with "regular
annual income" may file a petition for relief under chapter 12. 11 U.S.C. §§ 101(18), 101
(19A), 109(f). The purpose of this requirement is to ensure that the debtor's annual
income is sufficiently stable and regular to permit the debtor to make payments under a
chapter 12 plan. But chapter 12 makes allowance for situations in which family farmers
or fishermen have income that is seasonal in nature. Relief under chapter 12 is
voluntary, and only the debtor may file a petition under the chapter.
Under the Bankruptcy Code, "family farmers" and "family fishermen" fall into two
categories: (1) an individual or individual and spouse and (2) a corporation or
partnership. Farmers or fishermen falling into the first category must meet each of the
following four criteria as of the date the petition is filed in order to qualify for relief under
chapter 12:
- The individual or husband and wife must be engaged in a farming operation or a
commercial fishing operation. - The total debts (secured and unsecured) of the operation must not exceed
$3,237,000 (if a farming operation) or $1,500,000 (if a commercial fishing
operation). - 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. - 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.
In order for a corporation or partnership to fall within the second category of debtors
eligible to file as family farmers or family fishermen, the corporation or partnership must
meet each of the following criteria as of the date of the filing of the petition:
- 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. - The family or the family and its relatives must conduct the farming or commercial
fishing operation. - More than 80% of the value of the corporate or partnership assets must be
related to the farming or fishing operation. - The total indebtedness of the corporation or partnership must not exceed
$3,237,000 (if a farming operation) or $1,500,000 (if a commercial fishing
operation). - 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. - If the corporation issues stock, the stock cannot be publicly traded.
A debtor cannot file under chapter 12 (or any other chapter) if during the preceding 180
days a prior bankruptcy petition was dismissed due to the debtor's willful failure to
appear before the court or comply with orders of the court or was voluntarily dismissed
after creditors sought relief from the bankruptcy court to recover property upon which
they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a
debtor under chapter 12 or any chapter of the Bankruptcy Code unless he or she has,
within 180 days before filing, received credit counseling from an approved credit
counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy
administrator) (1) has determined that there are insufficient approved agencies to
provide the required counseling. If a debt management plan is developed during
required credit counseling, it must be filed with the court.
How Chapter 12 Works
A chapter 12 case begins by filing a petition with the bankruptcy court serving the area
where the individual lives or where the corporation or partnership debtor has its
principal place of business or principal assets. Unless the court orders otherwise, the
debtor also shall file with the court (1) schedules of assets and liabilities, (2) a
schedule of current income and expenditures, (3) a schedule of executory contracts and
unexpired leases, and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). A
husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a).
(The Official Forms may be purchased at legal stationery stores or downloaded from
the Internet at www.uscourts.gov/bkforms/index.html. They are not available from the
court.)
As of October 17, 2005, the courts must charge a $200 case filing fee and a $39
miscellaneous administrative fee. Normally the fees should be paid to the clerk of the
court upon filing. With the court's permission, however, they may be paid in
installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court
Miscellaneous Fee Schedule, Item 8. The number of such installments is limited to four
and the debtor must make the final installment no later than 120 days after filing the
petition. Fed. R. Bankr. P. 1006(b). For cause shown, the court may extend the time of
any installment, provided that the last installment is paid not later than 180 days after
the filing of the petition. Id. The debtor may also pay the $39 administrative fee in
installments. If a joint petition is filed, only one filing fee and one administrative fee are
charged. Debtors should be aware that failure to pay these fees may result in dismissal
of the case. 11 U.S.C. § 1208(c)(2).
In order to complete the Official Bankruptcy Forms which make up the petition,
statement of financial affairs, and schedules, the debtor will need to compile the
following information:
- A list of all creditors and the amounts and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly farming and living expenses, i.e., food,
shelter, utilities, taxes, transportation, medicine, feed, fertilizer, etc.
Married individuals must gather this information for each spouse regardless of whether
they are filing a joint petition, separate individual petitions, or even if only one spouse is
filing. In a situation where only one spouse files, the income and expenses of the non-
filing spouse is required so that the court, the trustee, and the creditors can evaluate the
household's financial position.
When a chapter 12 petition is filed, an impartial trustee is appointed to administer the
case. 11 U.S.C. § 1202. In some districts, the U.S. trustee appoints a standing trustee
to serve in all chapter 12 cases. 28 U.S.C. § 586(b). As in chapter 13, the trustee both
evaluates the case and serves as a disbursing agent, collecting payments from the
debtor and making distributions to creditors. 11 U.S.C. § 1202.
Filing the petition under chapter 12 "automatically stays" (stops) most collection actions
against the debtor or the debtor's property. 11 U.S.C. § 362. Filing the petition does not,
however, stay certain types of actions listed under 11 U.S.C. § 362(b). The stay arises
by operation of law and requires no judicial action. As long as the stay is in effect,
creditors generally cannot initiate or continue any lawsuits, wage garnishments, or even
telephone calls demanding payments. The bankruptcy clerk gives notice of the
bankruptcy case to all creditors whose names and addresses are provided by the
debtor.
Chapter 12 also contains a special automatic stay provision that protects co-debtors.
Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a
"consumer debt" from any individual who is liable with the debtor. 11 U.S.C. § 1201(a).
Consumer debts are those incurred by an individual primarily for a personal, family, or
household purpose. 11 U.S.C. § 101(8).
Between 20 to 35 days after the petition is filed, the chapter 12 trustee will hold a
"meeting of creditors." If the U.S. trustee or bankruptcy administrator schedules the
meeting at a place that does not have regular U.S. trustee or bankruptcy administrator
staffing, the meeting may be held no more than 60 days after the debtor files. During the
meeting the trustee puts the debtor under oath and both the trustee and creditors may
ask questions. The debtor must attend the meeting and answer questions regarding
the debtor's financial affairs and the proposed terms of the debtor's repayment plan. 11
U.S.C. § 343; Fed. R. Bankr. P. 4002. If a husband and wife have filed a joint petition,
they both must attend the creditors' meeting. In order to preserve their independent
judgment, bankruptcy judges are prohibited from attending. 11 U.S.C. § 341(c). The
parties typically resolve problems with the plan either during or shortly after the
creditors' meeting. Generally, the debtor can avoid problems by making sure that the
petition and plan are complete and accurate, and by consulting with the trustee prior to
the meeting.
In a chapter 12 case, to participate in distributions from the bankruptcy estate,
unsecured creditors must file their claims with the court within 90 days after the first
date set for the meeting of creditors. Fed. R. Bankr. P. 3002(c). A governmental unit,
however, has 180 days from the date the case is filed file a proof of claim. 11 U.S.C. §
502(b)(9).
After the meeting of creditors, the debtor, the chapter 12 trustee, and interested creditors
will attend a hearing on confirmation of the debtor's chapter 12 repayment plan.
The Chapter 12 Plan and Confirmation Hearing
Unless the court grants an extension, the debtor must file a plan of repayment with the
petition or within 90 days after filing the petition. 11 U.S.C. § 1221. The plan, which must
be submitted to the court for approval, provides for payments of fixed amounts to the
trustee on a regular basis. The trustee then distributes the funds to creditors according
to the terms of the plan, which typically offers creditors less than full payment on their
claims.
There are three types of claims: priority, secured, and unsecured. Priority claims are
those granted special status by the bankruptcy law, such as most taxes and the costs of
bankruptcy proceeding. (2) Secured claims are those for which the creditor has the right
to liquidate certain property if the debtor does not pay the underlying debt. In contrast to
secured claims, unsecured claims are generally those for which the creditor has no
special rights to collect against particular property owned by the debtor.
A chapter 12 plan usually lasts three to five years. It must provide for full payment of all
priority claims, unless a priority creditor agrees to different treatment of the claim or, in
the case of a domestic support obligation, unless the debtor contributes all "disposable
income" - discussed below - to a five-year plan. 11 U.S.C. § 1222(a)(2), (4).
Secured creditors must be paid at least as much as the value of the collateral pledged
for the debt. One of the features of Chapter 12 is that payments to secured creditors can
sometimes continue longer than the three-to-five-year period of the plan. For example, if
the debtor's underlying debt obligation was scheduled to be paid over more than five
years (i.e., an equipment loan or a mortgage), the debtor may be able to pay the loan off
over the original loan repayment schedule as long as any arrearage is made up during
the plan.
The plan does not have to pay unsecured claims in full, as long as it commits all of the
debtor's projected "disposable income" (or property of equivalent value) to plan
payments over a 3 to 5 year period ,and as long as the unsecured creditors are to
receive at least as much as they would receive if the debtor's nonexempt assets were
liquidated under chapter 7. 11 U.S.C. § 1225. "Disposable income" is defined as
income not reasonably necessary for the maintenance or support of the debtor or
dependents or for making payments needed to continue, preserve, and operate the
debtor's business. 11 U.S.C. § 1225(b)(2).
Within 45 days after filing the plan, the presiding bankruptcy judge decides at a
"confirmation hearing" whether the plan is feasible and meets the standards for
confirmation under the Bankruptcy Code. 11 U.S.C. §§ 1224, 1225. Creditors, who
receive 20 days' notice, may appear at the hearing and object to confirmation. Fed. R.
Bankr. P. 2002(a)(8). While a variety of objections may be made, the typical arguments
are that payments offered under the plan are less than creditors would receive if the
debtor's assets were liquidated, or that the plan does not commit all of the debtor's
disposable income for the three-to-five-year period of the plan.
If the court confirms the plan, the chapter 12 trustee will distribute funds received in
accordance with the terms of the plan.11 U.S.C. § 1226(a). If the court does not confirm
the plan, the debtor may file a modified plan. 11 U.S.C. § 1223. The debtor may also
convert the case to a liquidation under chapter 7. (3) 11 U.S.C. § 1208(a). If the debtor
fails to confirm a plan and the case is dismissed, the court may authorize the trustee to
keep some of the funds for costs, but the trustee must return all remaining funds to the
debtor (other than funds already disbursed to creditors). 11 U.S.C. § 1226(a).
On occasion, changed circumstances will affect the debtor's ability to make plan
payments. A creditor may object or threaten to object to a plan, or the debtor may
inadvertently have failed to list all creditors. In such instances, the plan may be modified
either before or after confirmation. 11 U.S.C. §§ 1223, 1229. Modification after
confirmation is not limited to an initiative by the debtor, but may also be made at the
request of the trustee or an unsecured creditor.11 U.S.C. § 1229(a).
Making the Plan Work
The provisions of a confirmed plan bind the debtor and each creditor. 11 U.S.C. § 1227.
Once the court confirms the plan, the debtor must make the plan succeed. The debtor
must make regular payments to the trustee, which will require adjustment to living on a
fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles
the debtor to retain property as long as payments are made, the debtor may not incur
any significant new debt without consulting the trustee, because additional debt may
compromise the debtor's ability to complete the plan.11 U.S.C. §§ 1222(a)(1), 1227. In
any event, failure to make the plan payments may result in dismissal of the case. 11 U.
S.C. § 1208(c). In addition, the court may dismiss the case or convert the case to a
liquidation case under chapter 7 of the Bankruptcy Code upon a showing that the debtor
has committed fraud in connection with the case. 11 U.S.C. § 1208(d).
The Chapter 12 Discharge
The debtor will receive a discharge after completing all payments under the chapter 12
plan as long as the debtor certifies (if applicable) that all domestic support obligations
that came due before making such certification have been paid. The discharge has the
effect of releasing the debtor from all debts provided for by the plan allowed under
section 503 or disallowed under section 502, with limited exceptions. Those creditors
who were provided for in full or in part under the plan may no longer initiate or continue
any legal or other action against the debtor to collect the discharged obligations.
Certain categories of debts are not discharged in chapter 12 proceedings. 11 U.S.C. §
1228(a). Those categories include debts for alimony and child support; money obtained
through filing false financial statements; debts for willful and malicious injury to person
or property; debts for death or personal injury caused by the debtor's operation of a
motor vehicle while the debtor was intoxicated; and debts from fraud or defalcation
while acting in a fiduciary capacity, embezzlement or larceny. The bankruptcy law
regarding the scope of a chapter 12 discharge is complex, however, and debtors
should consult competent legal counsel in this regard prior to filing. Those debts which
will not be discharged should be paid in full under a plan. With respect to secured
obligations, those debts may be paid beyond the end of the plan payment period and,
accordingly, are not discharged.
Chapter 12 Hardship Discharge
The court may grant a "hardship discharge" to a chapter 12 debtor even though the
debtor has failed to complete plan payments. 11 U.S.C. § 1228(b). Generally, a
hardship discharge is available only to a debtor whose failure to complete plan
payments is due to circumstances beyond the debtor's control and through no fault of
the debtor. Creditors must have received at least as much as they would have received
in a chapter 7 liquidation case, and the debtor must be unable to modify the plan. For
example, injury or illness that precludes employment sufficient to fund even a modified
plan may serve as the basis for a hardship discharge. The hardship discharge does
not apply to any debts that are nondischargeable in a chapter 7 case. 11 U.S.C. § 523.
________________________________________
NOTES
1. In North Carolina and Alabama, bankruptcy administrators perform similar functions
that U.S. trustees perform in the remaining forty-eight states. The bankruptcy
administrator program is administered by the Administrative Office of the United States
Courts, while the U.S. trustee program is administered by the Department of Justice.
For purposes of this publication, references to U.S. trustees are also applicable to
bankruptcy administrators.
2. Section 507 sets forth 10 categories of unsecured claims which Congress has, for
public policy reasons, given priority of distribution over other unsecured claims.
3. A fee of $15 is charged for converting a case under chapter 12 to a case under
chapter 7.
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