Chapter 12 Bankruptcy: Family Farmer and Family Fisherman Reorganization

What does Chapter 12 mean?

Chapter 12 is the chapter of title 11 of the United States Code that provides for the adjustment of debts of a family farmer or family fisherman with regular annual income. The Bankruptcy Code provides that only a family farmer or fisherman with regular annual income may file a petition under chapter 12; the purpose of that requirement is to ensure the debtor's annual income is stable and regular enough to make plan payments, with allowance for income that is seasonal in nature (Bankruptcy Administrator for the Southern District of Alabama, Chapter 12). Family farmers and family fishermen fall into two categories: an individual or individual and spouse, and a corporation or partnership. The definitions that decide who fits those categories live in 11 U.S.C. § 101, and a qualifying corporation or partnership must also satisfy the applicable family-ownership, operational, asset, debt, and other eligibility requirements in § 101(18)(B) or § 101(19A)(B).

Why does Chapter 12 matter in a bankruptcy case?

The chapter a case is filed under decides which rules govern it, and the differences are real. Chapter 12 is designed around a farming or fishing operation rather than around a wage earner or a large corporate reorganization. Subject to such limitations as the court may prescribe, a debtor in possession under Chapter 12 has the rights, powers, functions, and duties of a Chapter 11 trustee, with the exceptions stated in § 1203, including operating the debtor’s farm or commercial fishing operation (11 U.S.C. § 1203). Filing Chapter 12 does not by itself require the farming or fishing operation to stop. Chapter 12 also carries its own codebtor stay: after the order for relief, a creditor generally may not act to collect a consumer debt of the debtor from an individual who is also liable on that debt, subject to the exceptions and relief provisions in the section (11 U.S.C. § 1201). Because these rules are chapter-specific, a rule you read about chapter 7 or chapter 13 may not apply.

How does a Chapter 12 case work in practice?

The case is built around a plan. Under 11 U.S.C. § 1221 the debtor must file a plan not later than 90 days after the order for relief, and the court may extend that period only if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable. After expedited notice, the court holds a confirmation hearing, and except for cause that hearing must be concluded not later than 45 days after the plan is filed (11 U.S.C. § 1224). Except for payments provided for under § 1222(b)(5) or (b)(9), plan payments may not extend beyond three years unless the court for cause approves a longer period, and may not extend beyond five years (11 U.S.C. § 1222(c)). Chapter 12 has a trustee with duties under § 1202 who, except as the plan or confirmation order provides otherwise, makes payments to creditors under § 1226(c). Local procedures vary by court.

What do people get wrong about Chapter 12?

Three misreadings come up often. First, people treat the plan period as a fixed term. It is a ceiling, not a required duration: except for payments provided for under § 1222(b)(5) or (b)(9), plan payments may not extend beyond three years unless the court for cause approves a longer period, and may not extend beyond five years (11 U.S.C. § 1222(c)). Second, people assume a chapter 12 plan never involves selling anything. Section 1222(b)(8) says a plan may provide for the sale of all or part of property of the estate, or for distribution of estate property among those having an interest in it (11 U.S.C. § 1222(b)(8)). Third, people assume finishing the plan is the only route to a discharge. The court may also grant a discharge to a debtor who has not completed payments, but only where the conditions in 11 U.S.C. § 1228(b) are met.

Frequently asked questions

Can a corporation or partnership file under Chapter 12?

A qualifying corporation or partnership may file only if it satisfies the applicable family-ownership, operational, asset, debt, and other eligibility requirements in § 101(18)(B) or § 101(19A)(B) (11 U.S.C. § 101). Family farmers and family fishermen fall into two categories: an individual or individual and spouse, and a corporation or partnership (Bankruptcy Administrator for the Southern District of Alabama, Chapter 12). Whether a particular entity fits is a question for a lawyer.

What happens if the debtor cannot finish the plan payments?

The court may grant a discharge to a debtor who has not completed payments only if the debtor's failure is due to circumstances for which the debtor should not justly be held accountable, the value of property actually distributed on each allowed unsecured claim is not less than what would have been paid in a chapter 7 liquidation, and modification of the plan under § 1229 is not practicable (11 U.S.C. § 1228(b)).

Can a confirmed Chapter 12 plan be changed later?

Yes, within limits. At any time after confirmation but before payments are completed, the plan may be modified on request of the debtor, the trustee, or the holder of an allowed unsecured claim, to change payment amounts, extend or reduce the time for payments, or make other listed adjustments (11 U.S.C. § 1229). The modified plan becomes the plan unless, after notice and a hearing, the modification is disapproved.

Sources

• 11 U.S.C. § 101 · official source
• 11 U.S.C. § 1201
• 11 U.S.C. § 1202
• 11 U.S.C. § 1203
• 11 U.S.C. § 1221
• 11 U.S.C. § 1222
• 11 U.S.C. § 1224
• 11 U.S.C. § 1226
• 11 U.S.C. § 1228
• 11 U.S.C. § 1229
• Bankruptcy Administrator for the Southern District of Alabama, Chapter 12

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