How Chapter 12 Works
A Chapter 12 case begins when the debtor files a voluntary petition for relief. Most Chapter 12 debtors also file a “plan” with their petition. The plan sets forth how the debtor intends to repay creditors over a three- to five-year period.
The Repayment Plan
After the paperwork has been filed, a meeting of creditors is held. This provides an opportunity for creditors to object to the proposed repayment plan. If there are no objections, or if any objections are resolved, the bankruptcy court will confirm the repayment plan.
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 of filing, but it can be postponed for good cause.
To confirm a Chapter 12 plan, the court must find that:
- The debtor is eligible for Chapter 12 relief;
- The debtor’s plan complies with the requirements of the Bankruptcy Code
- Confirmation of the plan is in the best interests of creditors and is not likely to be followed by liquidation or further reorganization.
Creditors are entitled to vote on the debtor’s plan. To be confirmed over the objections of creditors, a debtor’s plan must satisfy one of two tests: The so-called “best interests” test or the “feasibility” test.
- Under the best interests test, confirmation is appropriate if unsecured creditors would receive at least as much from the debtor’s plan as they would if the debtor were liquidated under Chapter 7.
- Under the feasibility test, confirmation is appropriate if the debtor’s plan appears likely to succeed. The court must find that the debtor can make all payments required by the plan and still maintain a reasonable standard of living.
If a Chapter 12 debtor’s plan is confirmed, he or she must make payments to the trustee as required by the plan. The trustee then pays creditors in accordance with the terms of the plan.
Chapter 12 plans typically provide for payments to unsecured creditors of less than full payment and stretched out over three to five years. Secured creditors are paid in full (or over a longer period of time, if the debtor so elects).
Chapter 12 also provides for “automatic stays.” The automatic stay protects debtors from creditors who may try to collect their debts outside of bankruptcy court. The stay goes into effect when the Chapter 12 petition is filed and remains in effect until the case is closed, dismissed, or converted to another chapter.
If the debtor successfully completes all payments required under the plan, he or she will be discharged from most remaining debts.
The Eligibility for Chapter 12 Bankruptcy
Chapter 12 of the bankruptcy code is reserved for family farmers and fishermen. In order to be eligible to file for Chapter 12 bankruptcy, the debtor must:
- Be engaged in a farming or commercial fishing operation;
- Have total debts not more than $11,097,350 if they are farmers or $2,268,550 if they are fishermen (for cases filed between April 1, 2022, and March 31, 2025);
- Owe 50% or more of their total debts on account of farming operations or 80% or more 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.
If the debtor is a family partnership or corporation, additional restrictions apply. Partnerships and corporations cannot file for Chapter 12 bankruptcy unless a single family owns more than 50% of their stock or equity interests.
The Pros and Cons of Choosing Chapter 12 bankruptcy
Chapter 12 bankruptcy provides many benefits for farmers and fishermen who are facing financial distress. The automatic stay that goes into effect upon filing can stop all collection actions against the debtor or the debtor’s property, giving the debtor some much-needed breathing room or bankruptcy reflief. In addition, the debtor is able to repay creditors over time from future earnings, and may receive certain debt relief.
A key advantage of Chapter 12 over Chapter 7 is that it allows farmers and fishermen to keep their operations going while they repay their creditors. Chapter 12 also has certain procedural advantages over other chapters, such as a longer period of time to file a plan and easier procedures for modifying the plan if circumstances change.
The cons of choosing Chapter 12 bankruptcy include the fact that it is a more complex process than other types of bankruptcy, such as Chapter 7. As a result, it can be more expensive to file for Chapter 12 bankruptcy.
Additionally, if you do not make the required payments under the repayment plan, your case can be dismissed and you will not receive a discharge of your debts.
Like other chapters, however, Chapter 12 has its drawbacks. One is that it is only available to farmers and fishermen with regular annual income. Another is that confirmation of the plan requires approval by both the debtor’s creditors and the bankruptcy court. This can be a difficult hurdle to clear, especially if the debtor’s creditors are not cooperative.
As with other bankruptcy chapters, certain debts are not discharged in a chapter 12 bankruptcy, including child support and alimony obligations; debts for willful and malicious injury to person or property; certain taxes; certain student loans; and debts incurred through fraud or false pretenses.
The Costs Associated with Filing for Chapter 12 Bankruptcy
The costs associated with filing for Chapter 12 bankruptcy include the filing fee and the cost of hiring an attorney to assist you with the process. If you are unable to pay the filing fee in full, you may be able to file a motion to have the fee waived or deferred.
You will also need to pay a chapter 12 trustee for their services in administering your repayment plan. The trustee’s fees are typically a percentage of the payments made under the plan and are paid out of those payments.
Chapter 12 plans typically provide for payments to unsecured creditors of less than the full amount of their claims. However, priority creditors (such as taxes and child support) must be paid in full under the plan.
Call our Bankruptcy Attorney Now!
The Rollins Law Firm is an experienced bankruptcy attorney in Jackson, Mississippi. We have helped many farmers and fishermen successfully file for bankruptcy cases under Chapter 12 bankruptcy. However, it is important to understand all of the requirements of this chapter before filing. An experienced bankruptcy lawyer can help you determine whether Chapter 12 is right for your particular circumstances. Contact the Rollins Law Firm today to schedule a consultation with a Mississippi Chapter 12 bankruptcy attorney.