Chapter 12 Tutorial Part III: The Chapter 12 Plan
A Chapter 12 debtor must file a repayment plan no later than 90 days after the petition date unless the court grants an extension due to circumstances "for which the debtor should not justly be held accountable." 11 U.S.C. § 1221. The plan provides for payments of fixed amounts to the trustee on a regular basis and must be approved by the Court. The trustee then distributes the funds to creditors according to the terms of the plan, which typically pays creditors some amount less than 100 cents on the dollar.
There are three types of claims that must be provided for in the plan:
- Creditors holding priority claims are granted special status by the bankruptcy law, such as claims for back taxes, domestice support obligations, such as child support, and the costs of the bankruptcy proceeding, including the fees of the attorneys and the trustee. 11 U.S.C. § 507;
- Secured claims are those for which the creditor has the right to liquidate certain property if the debtor does not pay the underlying debt, such as loans given secured by real property or equipment; and
- 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 provides for a three or, if the Court allows, five year repayment period. The plan must provide for full payment of all priority claims except for three exceptions:
- if the claim is owed to a governmental unit arising out of the sale or disposition of a farm asset used in the farm operation, in which case the claim is treated as unsecured;
- If 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)(A) and (B), (4).
Secured creditors must be paid at least as much as the value of the property used to secure the debt. An interesting aspect of Chapter 12 bankruptcy 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 was scheduled for payment 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 of 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 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. 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).
The provisions of a confirmed plan bind the debtor and each creditor. 11 U.S.C. § 1227. The debtor must make the plan succeed once the court confirms the plan. 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 This is 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 showing that the debtor has committed fraud in connection with the case. 11 U.S.C. § 1208(d).
Next time in Part IV, I discuss the discharge under Chapter 12 of the Bankruptcy Code.
