Chapter 12 bankruptcy is federal court-ordered and supervised procedure for family farmers or fishermen in which a debtor obtains a discharge of some debts while retaining many assets. This type of bankruptcy is often called "reorganization." It is less expensive and less complicated than if a debtor chose to reorganize under Chapters 11 or 13.
Who Can File?
Only debtors who can demonstrate stable and regular income arising from a family farming of fishing business are eligible to file. A debtor must not have had a bankruptcy petition dismissed 180 days before filing. Debtors must complete credit counseling from a certified counseling agency prior to filing for bankruptcy protection.
Bankruptcy Petition Requirements and Fees
The debtor must pay filing fees and file a petition with the bankruptcy court that includes a financial statement outlining the debtor's income, expenses, assets, liabilities, and any executory leases and contracts. A debtor must voluntarily file for a Chapter 12 bankruptcy; creditors cannot force somone into Chapter 12 bankruptcy against their wishes.
Bankruptcy Case Trustee
The court appoints a bankruptcy trustee to evaluate and manage the case. The trustee collects payments from the debtor and distributes them to the creditors according to the debtor's repayment plan, discussed in further detail below.
Within ninety days of filing, the debtor must file a debt repayment plan with the court. The repayment plan generally lasts for three years and may be extended up to five years. Certain long-term debt can be repaid beyond the five years with court approval. The debtor must commit all of his disposable income to the repayment of debt over this time period.
The court will confirm the plan upon proof that the repayment schedule is feasible. Failure of the debtor to prove feasibility may result in the court converting the case to a Chapter 7 liquidation bankruptcy.
Types of Claims
There are three types of claims in a Chapter 12 bankruptcy: priority, secured and unsecured. Taxes, domestic support orders, and bankruptcy case administrative costs are examples of priority claims and must be paid first. Next, secured claimholders receive payment. Unsecured claims are paid last.
If a debtor wishes to keep a secured asset, the debtor must repay the secured creditors the value of the collateral that secures the debt. While some unsecured debt may not be repaid in full over the lifetime of the repayment plan, the unsecured creditors must receive at least as much payment as they would have received under a Chapter 7 liquidation bankruptcy.
Automatic Stay and Creditors' Meeting
Upon filing of the petition, the "automatic stay" is triggered. Creditors are prohibited from pursuing collection activities against the debtor. The automatic stay prevents such actions as wage garnishment, property liens, or lawsuits initiated to collect a debt.
Within twenty to forty days of filing, the trustee holds a creditors' meeting. The trustee and creditors may question the debtor regarding his financial matters and the repayment plan. Should the trustee and creditors determine that repayment is feasible, the trustee will recommend confirmation of the plan to the court. Upon conclusion of the repayment plan, all unsecured debts are discharged in full.
A Chapter 12 bankruptcy is a viable option for family farmers or fishermen who seek relief from their business debts. Reorganization offers the potential for the business to become profitable once again, for debts to be repaid in part or full, and for the family business to survive.