Chapter 12 Bankruptcy -

      Chapter 12 is an adjustment of debts of a family farmer or fisherman with regular annual income. It encourages people to reorganize their debts rather than selling the family farm or boat, and is less complicated and expensive than a Chapter 11 reorganization. It was enacted in the era of the "Farm Aid" concerts, first put on in September, 1985 by Willie Nelson, John Cougar Mellencamp, Neil Young, and other pop and country entertainers The law contained "sunset" provisions providing for its automatic expiration in 1993. However, due to the continuing distress of the family farmer, it was repeatedly extended over the years. It was finally made a permanent part of the Bankruptcy Code as part of BAPCPA in 2005. At that time, its coverage was expanded to include family fishermen. Incidentally, the 20th Anniversary Farm Aid concert at the Tweeter Center in Camden, New Jersey in 2006 featured the original headliners, plus Los Lonely Boys, Arlo Guthrie, and Jerry Lee Lewis.

Other Chapter 12 Pages

      View these pages for more information on Chapter 12.

Qualifications and Comparison to Chapter 13 Discharge / Hardships and Exemptions

Classification of Claims

      Under 11 U.S.C. Section 1221(a)(1), the Chapter 12 Plan is funded by the Debtor making annual plan payments from his future earnings and income to the Chapter 12 Trustee. The Plan then sorts creditors' claims into 3 categories: unsecured priority, secured, and unsecured nonpriority claims. Priority claims include taxes, administrative expenses of the Chapter 12, and other debts that have been granted special status under the Bankruptcy Code. Secured claims are those where the creditor has a lien on a particular piece of property (house or car, for instance), and would have the right to sell that property if the debtor defaulted in payment. Unsecured nonpriority claims are general, unsecured claims, with no special status under the Code, and no right to collect against any particular piece of property.

Plan Needs to Pay Priority Claims in Full

      To be confirmed, the Chapter 12 Plan needs to pay priority claims in full, unless they agree to less favorable treatment. In the case of domestic support obligations ("DSO" debt), although priority in nature, they can be paid less than in full as long as the debtor contributes all of his "disposable income" into the plan. Under 11 U.S.C. Section 1222(b)(2), secured creditors must be paid at least as much as the value of the collateral which stands as security for the debt, which means that "lien-stripping" is allowed. Finally, unsecured creditors are required to receive whatever is left of the Debtor's projected "disposable income" over the 3-5 year period. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents of for making payments needed to preserve, continue, and operate the debtor's farming or commercial fishing business. Under 11 U.S.C. Section 1225(a)(4), the amount paid to unsecured nonpriority creditors also needs to be at least as much as they would receive if the Debtor's nonexempt assets were liquidated in Chapter 7. This is the so-called "best interests of creditors" test.

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Effect of Plan Confirmation

      Under Bankruptcy Code Section 1227(a), a confirmed Chapter 12 Plan binds the debtor and his creditors, even those creditors who may have objected to confirmation of the plan. It becomes the new contract between the parties. Unless the court orders otherwise, confirmation of the Chapter 12 plan also operates to "re-vest" the property of the bankruptcy estate back in the debtor, free of any claim or interest, except of course secured claims.

Debtor's Performance under the Plan

      After confirmation, it is really up to the debtor to make the plan work. He is going to be required to live on a strict budget, at least until he can complete his plan payments. Under Bankruptcy Code Sections 1222(a)(1) & 1227, the debtor is supposed to first consult with the Chapter 12 Trustee before he incurs any substantial new debt, like borrowing to buy a new tractor. This is to maximize the ability of the debtor to perform under the plan. These purchases will be analyzed on a case-by-case basis.

Post-confirmation Modification of the Plan

      Sometimes, despite his best efforts, the debtor is unable to perform under the Plan. Congress has taken this into account by enacting Bankruptcy Code Section 1229(a). That section provides that a Chapter 12 Plan can be modified after confirmation, for cause shown. This can include increasing or decreasing payments due to a change in the debtor's income or expenses, extending the time for payment (as long as the plan term does not exceed 5 years), and decreasing the payment to a particular credit if that creditor has received payment from another source, such as from a co-signer of the debt. The modified plan still has to meet the statutory requirements for confirmation. In no event can a creditor seek to retroactively increase the plan payments, per 11 U.S.C. Section 1229(d)(1).

Written by Henry Rendler