A Chapter 12 debtor must file a plan of repayment with the petition or within 90 days after filing the petition. However, a court has power to grant extension of time to file a plan. A plan is filed for the fair repayment of debts and the reorganization of the farming operation. The plan may modify the terms of debt repayment of either secured or unsecured creditors, may provide for the curing or waiving of a default over a reasonable period of time. Additionally, it may provide for the liquidation of farm collateral.
A Chapter 12 plan must be submitted to the court for approval and it provides for payments of fixed amounts to the trustee on a regular basis. The trustee then distribute the funds to creditors according to the terms of the plan, which usually offers creditors less than full payment on their claims.
A Chapter 12 plan usually lasts three to five years. Under the Plan different types of claims are treated differently. It must provide for full payment of all priority claims, unless 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” to a five-year plan.
Secured claims are those for which the creditor has the right to liquidate certain property if the debtor does not pay the underlying debt. Secured creditors must be paid at least as much as the value of the collateral pledged for the debt. Payments to secured creditors can sometimes continue longer than the three-to-five-year period of the plan. Although the plan itself is limited to three to five years, there is an exception for specific long term debt. Long term debt may be paid over a period exceeding five years.
Generally, the creditor has no special rights to collect against particular property owned by the debtor with regard to unsecured debts. The plan does not have to pay unsecured claims in full, as long as it commits all of the debtor’s projected “disposable income” to plan payments over a 3 to 5 year period. Also, the plan must provide unsecured creditors at least as much as they would receive through Chapter 7 liquidation. “Disposable income” includes only that income which remains after all farm and living expenses have been paid. The repayment can be extended over a three year period. The court may extend the term of the plan for up to five years if cause for a longer repayment period is shown.
A confirmation hearing of the Plan is conducted within 45 days after filing the plan. The bankruptcy Judge decides whether a plan is reasonable and meets the standards for confirmation under the Bankruptcy Code at a “confirmation hearing”. Creditors, who receive 21 days’ notice, may appear at the hearing and object to confirmation.
If the court confirms the plan after the confirmation hearing, the chapter 12 trustee will distribute funds received in accordance with the terms of the plan. The confirmation of a Chapter 12 plan does not discharge all debts, instead confirms the ongoing credit relationship between the parties during the life of the Chapter 12 plan.
If the court does not confirm the plan, the debtor may file a modified plan. The debtor may also convert the case to liquidation under chapter 7. The plan may be modified either before or after confirmation if a creditor object or threaten to object to a plan, or the debtor may by mistake have failed to list all creditors. Modification after confirmation may either be initiated by the debtor, the trustee or an unsecured creditor. 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. However, the trustee must return all remaining funds to the debtor.