Chapter Twelve Bankruptcy - The Chapter 12 Plan and Confirmation Hearing

by


A repayment plan must be filed with the bankruptcy petition or within ninety days after filing the petition unless the court grants a extension. 11 United States Code, Sub-Section- 1221. The plan of bankruptcy, which has to be submitted for approval, to the court, provides fixed amounts of payments on a regular basis to the trustee. This money will then be distributed, by the trustee, to the creditors according to the terms of the bankruptcy plan, which will usually offer the creditors a lessor amount than a full payment on their claims.


Priority, secured, and unsecured are the three types of claims. Priority claims are those in which a special status is granted by the bankruptcy law, this includes many types of taxes and the costs of the bankruptcy proceeding. Secured claims are those that the creditor has the right to liquidate certain types of property if the debtor does not pay the debt underlying the property. In contrast to secured claims, unsecured claims are for those for which the creditor maintains no special rights to a particular property owned by the debtor that the creditor can collect on.

A chapter twelve bankruptcy plan usually will last from 3 to 5 years. It must provide for the full payment of all priority claims, unless a priority creditor agrees to different terms to the claim or, in the case of a domestic support obligation, unless the debtor contributes all "disposable income" - discussed below - to a 5 yr. plan. 11 United States Code, Sub-Section- 1222(a)(2), (4).

Secured creditors must be paid for at least as much as the total value of the collateral that was pledged for the debt. One of the features of Chapter twelve is that payments to secured creditors can sometimes continue longer than the 3-5 year period of the bankruptcy plan. For example, if the debtor's underlying debt obligation was scheduled to be paid over more than 5 years (such as a loan for equipment or a mortgage loan), the debtor may be able to pay the loan off over the original terms of the loan repayment schedule as long as any arrearage is made up during the bankruptcy plan.

The bankruptcy plan does not have to pay unsecured claims in the full amount, as long as it commits all of the debtor's projected "disposable income" (or property of the same value) to plan payments over a three to five year time 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 a chapter seven bankruptcy plan. 11 United States Code, Sub-Section- 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 United States Code, Sub-Section- 1225(b)(2).

Within forty-five days after filing the bankruptcy plan, the bankruptcy judge presiding over the case decides at a "confirmation hearing" whether the bankruptcy plan filed is feasible and meets the standards for confirmation under the Bankruptcy Code. 11 United States Code, Sub-Section- 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 arguments that are usually typical 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 three-to-five-year period of the plan.

If the bankruptcy court confirms and approves the plan, the trustee in charge of the chapter 12 case will distribute the money received in accordance with the terms of the plan. 11 United States Code, Sub-Section- 1226(a). If the court does not confirm the bankruptcy plan that was submitted, the debtor may submit a modified plan. 11 United States Code, Sub-Section- 1223. The debtor may also convert the case to a liquidation under chapter 7. (3) 11 United States Code, Sub-Section- 1208(a). If the debtor fails to confirm a plan and the case is thrown out, the court may authorize the trustee to keep some funds for costs, but the trustee must return all the remaining money to the debtor (other than funds already disbursed to creditors). 11 United States Code, Sub-Section- 1226(a).

On occasion, changed circumstances will affect the debtor's ability to make bankruptcy 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 United States Code, Sub-Section- 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 United States Code, Sub-Section- 1229(a).

The provisions of a confirmed plan bind each creditor and the debtor . 11 United States Code, Sub-Section- 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. Also, 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, because additional debt may compromise the debtor's ability to complete the plan. 11 United States Code, Sub-Section- 1222(a)(1), 1227. Failure to make the plan payments, in any event may result in case dismissal. 11 United States Code, Sub-Section- 1208(c). Furthermore, the court may convert the case to a liquidation case or dismiss the case under chapter seven of the Bankruptcy Code upon a showing that the debtor has committed fraud in connection with the case. 11 United States Code, Sub-Section- 1208(d).

View the Chapter Twelve Bankruptcy Topics

Learn the different Types Of Bankruptcy Cases

Although all information has been written in good faith and reviewed, please email us at [email protected] to report any inaccuracies.