Chapter 12 Bankruptcy Overview
Chapter 12 bankruptcy is a relatively new addition to the bankruptcy laws. It allows “family farmers” and “family fishermen” to restructure their finances and avoid liquidation or foreclosure. It’s very similar to Chapter 13 bankruptcy, but provides additional benefits to debtors.
Who Can File Chapter 12 Bankruptcy?
Under the bankruptcy laws, only a family farmer or fisherman with “regular annual income” may seek protection under Chapter 12. “Regular annual income” may be seasonal as long as it is stable and regular enough to allow the debtor to make payments under a Chapter 12 plan.
Debtors under Chapter 12 may be individuals (married or single), corporations, or partnerships. Individual Chapter 12 debtors must:
be engaged in a farming or commercial fishing operation
have total debts of not more than $4,031,575 if they are farmers, or $1,868,200 if they are fishermen
owe 50% of their total debts on account of farming operations, or 80% of their total debts on account of commercial fishing operations (in both cases excluding home mortgages), and
derive over 50% of their gross income from farming or commercial fishing operations.
Similar restrictions apply to farms and fishing operations owned through family partnerships and corporations. Partnerships and corporations cannot file bankruptcy under Chapter 12 unless a single family owns more than 50% of their stock or equity interests.
How Does a Chapter 12 Bankruptcy Work?
A Chapter 12 case begins when the debtor files a voluntary petition for relief. Most Chapter 12 debtors continue farming or fishing operations after they file bankruptcy. A bankruptcy trustee is appointed, but generally, his or her duties are limited to reviewing documents, monitoring the debtor’s operations, advising the court, and collecting and disbursing plan payments.
Chapter 12 debtors must propose a repayment plan within 90 days of the date that they file bankruptcy. The bankruptcy court can extend the plan deadline in certain circumstances.
The Chapter 12 Bankruptcy Repayment Plan
The plan process in Chapter 12 is similar to that in Chapter 13. Under Chapter 12, debtors propose a plan to pay creditors over three to five years. Three years is the minimum plan period in Chapter 12 unless the debtor can pay all amounts owed sooner. The plan period can be extended to five years with court approval. The plan period must be five years if the debtor owes domestic support obligations (child support or alimony) that he or she does not pay in full sooner.
Confirmation of the Chapter 12 Plan
Chapter 12 plans are subject to bankruptcy court approval, or “confirmation.” The hearing on confirmation is supposed to be held within 45 days of the date that the plan is filed. Before the confirmation hearing, the Chapter 12 trustee reviews the proposed plan and other documents filed by the debtor and makes recommendations to the bankruptcy court. The bankruptcy court is responsible for deciding whether to confirm a proposed Chapter 12 plan, but most judges rely heavily on the trustee’s recommendations.
Elements of a Chapter 12 Plan
Here are the basic parts of a Chapter 12 repayment plan:
Required plan payments. During the plan period, the debtor must turn over all of his or her “disposable income” to the Chapter 12 trustee. “Disposable income” in a Chapter 12 case is the difference between the revenue generated by the debtor’s farm or fishing operations and the amount reasonably needed to cover:
business expenses, and
expenses incurred in the maintenance and support of the debtor’s family.
The trustee retains a fee from the plan payments and disburses the balance to creditors.
Mortgages and other secured claims. One of the advantages of Chapter 12 is that it allows debtors to “cram down” secured debt, like farm mortgages and boat loans. Mortgage lenders and other secured creditors must be paid at least the value of the collateral pledged for the debt. Any balance owed in excess of the collateral’s value can be treated as unsecured debt, which is often paid little or nothing in Chapter 12 cases. Payments on secured debt can be stretched out even beyond the term of the plan, and interest can be reduced to a current market rate.
Discharge of debt. Chapter 12 plans have to meet the “best interests of creditors” test. Under the “best interests” test, creditors have to be paid at least as much under a Chapter 12 plan as they would receive in a Chapter 7 bankruptcy liquidation. As long as the “best interests” test is met, unsecured creditors can be paid pennies on the dollar or even nothing at all.
The End of the Case
After the confirmation hearing, the case remains open until the debtor makes all required payments to the Chapter 12 trustee. Once all required payments have been made, the court grants the debtor a discharge, and the case is closed. A discharge, with some exceptions, eliminates a debtor’s liability for obligations not covered by its Chapter 12 plan. Most obligations are dischargeable. There are, however, some obligations, such as child support and alimony, that are non-dischargeable even under Chapter 12.
A Chapter 12 case can be dismissed if the debtor cannot obtain plan confirmation or make required payments. A debtor also can elect to dismiss a Chapter 12 case or convert it to a Chapter 7 liquidation.