Chapter 12 Bankruptcy Overview

The purpose of Chapter 12 can be inferred from its official title —Chapter 12: Adjustments of Debts of a Family Farmer with Regular Annual Income. Chapter 12 was added to the Bankruptcy Code as an emergency act in 1986 to provide greater relief to family farmers than was being provided by Chapter 11. Most farmers couldn't use Chapter 13 because their farms incurred debts that were higher than the debt limits under Chapter 13. Another impediment to Chapter 13 was that it was only available to individual debtors, but many farms were organized as businesses. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made Chapter 12 a permanent part of the Bankruptcy Code and expanded eligibility to family fishermen.

Other advantages of Chapter 12 are that it is simpler and less expensive than Chapter 11 and it takes into consideration the seasonal fluctuation in income of farmers and fishermen. Chapter 12 only allows voluntary petitions, so only the debtor can file a petition. Creditors cannot force the debtor into Chapter 12 with an involuntary petition.

Chapter 12 works like Chapter 13, since much of the code was simply copied from Chapter 13 to Chapter 12, but Chapter 12 has provisions that are more beneficial to farmers and fishermen.

Chapter 12 Eligibility

The debt limitations under Chapter 12 are more generous than Chapter 13 and there is no distinction in whether the debt is secured or unsecured — the debt limits are for total debt irrespective of liens. The debt limits are adjusted according to inflation every 3 years, and as of April 1, 2007, the limit for the family farmer is $3,544,525 and for the family fisherman, $1,642,500. Petitioners with higher debts than these limits must file under Chapter 11.

There are some differences in eligibility requirements between debtors filing as individuals or as partnerships or corporations.

Individual or Married Couple:

• The individual or couple must operate either a farming operation or a commercial fishing operation.
• Excluding the debt of the debtor's homestead, at least 50% of the farmer's debt or 80% of the fisherman's debt must have been incurred for their enterprise.
• For both family farmers and family fishermen, more than 50% of the debtor's income must have come from either farming or fishing, and for family farmers, the 50% rule also applies to the 2^nd and 3^rd tax year previous to filing for bankruptcy.

Partnership or Corporation:

• More than 50% of the equity in the business must be owned by 1 family and their relatives.
• The family and their relatives must operate the business.
• More than 80% of the business assets must be related to the farming or fishing operation.
• Excluding the homestead of a shareholder, at least 50% of the debts from the farming business or 80% of the debts from the fishing business must have been incurred as part of the business.
• A corporation cannot issue publicly traded stock.

The other eligibility requirements of Chapter 12 are like other chapters of bankruptcy for individuals. The debtor must take a credit counseling course that is approved by the U.S. Trustee within 180 days previous to the filing date, and if the debtor worked out a debt management plan in the course, it must be submitted to the court with the petition.

A debtor also cannot file if, within the previous 180 days, a previous bankruptcy was dismissed because the debtor did not attend a court hearing or comply with orders of the court, or if the debtor dismissed his case because a creditor filed a motion to lift the automatic stay. This last provision was enacted to prevent debtors from continually filing for bankruptcy to use the automatic stay to prevent foreclosure of real property, forcing the lender to start the foreclosure procedure all over again, which often required months.

How Chapter 12 Works

A Chapter 12 bankruptcy case begins as any other — by filing a petition in the court serving the debtor's domicile that includes, among other required financial information:

• schedules of assets and liabilities;
• income and expenses, including
  • a detailed list of the debtor's monthly living and business expenses;
  • the source, amount, and frequency of the debtor's income;
• executory contracts and leases;
• a statement of financial affairs;
• a list of all creditors with the amounts owed and the type of debt;
• a list of the debtor's property.

Whether an individual or both husband and wife (joint filing) are filing, the income and expenses of both people are required so that the court has a better overview of the family's finances.

A filing fee of $239 must be paid to the court clerk at the time of filing, although the fee could be paid in installments with court approval.

Once the petition is filed, then the automatic stay prevents any further action by most creditors to collect their debts. Any actions they take must be through the bankruptcy court which takes complete jurisdiction over the case. The automatic stay also applies to co-debtors of consumer debts.

A few payments, known as priority payments, which include domestic support obligations and current taxes, are not stayed. The debtor must continue making priority payments.

A standing trustee manages the case, evaluating the debtor's petition, then acts as the disbursing agent — the debtor sends payments to the trustee, who then sends the payments to unsecured creditors according to the payment plan.

If domestic support obligations are not being paid 100%, then the payment plan must span 5 years and the debtor must apply 100% of his disposable income; otherwise, the repayment period is generally for 3 years. In no case, will the payment plan be longer than 5 years.

Creditors Meeting

About 20 – 35 days, but no more than 60 days, after filing, the debtor must attend a creditors meeting where the debtor must answer, under oath, questions by the trustee and by any creditors at the meeting. In a joint filing, both spouses must attend. If the debtor has already submitted a payment plan, then the trustee or creditors may ask about the plan or point out potential problems or defects.

All creditors who want to be paid must file a proof of claim within 90 days of the 1^st creditors meeting; government units have 180 days. (Usually there is only 1 meeting, but some meetings may be continued if additional information is required.)

Payment Plan and Confirmation Hearing

The debtor must file a payment plan either with the petition or within 90 days of the filing date. The debtor must attend a court confirmation hearing, along with the trustee and any concerned creditors, and seek the court's approval for the payment plan.

The hearing must be scheduled within 45 days after the plan is filed, and each creditor must receive a notice at least 20 days before the confirmation hearing. The judge must determine if the payment plan is feasible and if it satisfies the statutory requirements of the Code. Creditors may also file any objections to the plan at the confirmation hearing. Usually, the objections are that they are not receiving at least what they would have received under a Chapter 7 liquidation, or that the debtor is not committing 100% of his disposable income over the plan period.

If the judge approves of the plan, then the debtor must follow through by making the required payments. However, if the judge disapproves of the plan, the debtor can attempt to modify the plan to the satisfaction of the judge, or the debtor can convert his case to Chapter 7 liquidation. If the debtor cannot get the plan confirmed, then the judge may dismiss the case. The trustee will then return any payments received, minus administration expenses, to the debtor.

Sometimes a plan may be modified after confirmation, either because of changed circumstances, such as less business or a major medical expense, or because a creditor was not listed in the bankruptcy petition, and, thus, received no notice of the bankruptcy. An application to modify the plan may be made by the debtor, the trustee, or an unsecured creditor. The court must approve of any modifications.

Debtor Duties

The debtor must make regular fixed payments to the trustee, who then distributes the payments to the debtor's creditors. If the debtor fails to make the payments, the case may be dismissed. Furthermore, the debtor cannot incur any new debt without permission from the trustee, since this may lessen the debtor's ability to continue the payments required for the payment plan. Hence, a debtor must live on a fixed budget during the 3 – 5 years of his bankruptcy.

There are 3 types of payments that must be made. Priority payments must be paid in full, unless the creditor allows otherwise. If priority payments can't be paid in full, then the debtor must use all disposable income, which is any money left over after paying necessary living expenses for the debtor and his dependents and to operate the farming or fishing business, to make payments over a 5 year period.

The debtor must pay at least the value of the collateral for secured debts, but not necessarily the full amount of the debt. For certain types of property, especially for mortgages, the debtor is permitted to take longer than 5 years for that particular payment to pay off the debt; otherwise, it could be unaffordable.

Unsecured creditors are usually paid for less than the full amount of their debt, but they must receive at least what they would have gotten in a Chapter 7 liquidation.

If the debtor has committed fraud, then the bankruptcy case may be dismissed or converted to a Chapter 7 liquidation.

Chapter 12 Discharge

If the debtor successfully completes the payment plan and certifies that all domestic support obligations have been paid, then he will receive a discharge of most of his debts. The creditors of the discharged debts can no longer take any more action to try to collect their debts.

There are certain debts that are not discharged by bankruptcy. Most of these debts are either priority payments, such as domestic support obligations, or they are debts incurred as the result of fraud or negligence that resulted in personal injury.

Also not discharged are debts for secured property where the debtor has elected to take a longer time to pay off the debt, such as is usually the case for mortgages.

Chapter 12 Hardship Discharge

If the debtor is unable to continue making plan payments, then he may receive a hardship discharge if the following requirements are met:

• His income has been reduced because of circumstances beyond his control and through no fault of his own.
• The change in circumstances cannot be corrected that would enable the debtor to continue making payments. A good example is if the debtor has suffered a serious injury or medical illness that will preclude employment.
• All of the debtor's creditors have been paid at least as much as they would have received under a Chapter 7 liquidation.

One drawback to the hardship discharge is that only debts that are dischargeable under Chapter 7 are dischargeable under the Chapter 12 hardship discharge. However, the BAPCPA has lessened the differences between these discharges, and so the drawback is lessened as well.