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Chapter 12 |
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Chapter 12 |
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Part 25. Special
Topics
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Chapter 17. Bankruptcy
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Section 12. Bankruptcy
Processing of Chapter 12 Cases
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25.17.12 Bankruptcy Processing of
Chapter 12 Cases
- 25.17.12.1
Introduction
- 25.17.12.2
Description
of Chapter 12
- 25.17.12.3
Chapter
12 Eligibility
- 25.17.12.4
Preliminary
Issues
- 25.17.12.5
Chapter
12 Plans
- 25.17.12.6
Reasons
to Object to the Plan
- 25.17.12.7
Chapter
12 "Pay-out" Arrangements
- 25.17.12.8
Confirmation
- 25.17.12.9
Monitoring
Compliance
- 25.17.12.10
Dismissals
- 25.17.12.11
Conversions
- 25.17.12.12
Discharge
- 25.17.12.13
Hardship
Discharge
- 25.17.12.14
Exceptions
from Discharge
- 25.17.12.15
Revocation
— Fraud
25.17.12.1 (09-01-2004)
Introduction
1.
This
section defines a Chapter 12 bankruptcy proceeding
and provides instructions for the Insolvency
function to work a case to conclusion. Chapter 12 is
similar to a Chapter 13 bankruptcy, but only a
" family farmer" can be a debtor under
Chapter 12.
25.17.12.2 (09-01-2004)
Description of Chapter 12
1.
Family Farmer. Chapter 12 is the bankruptcy proceeding used
for the adjustment of debts of a family farmer with
regular annual income. Chapter 12, designed to save
the family farmer, is closely modeled after Chapter
13, but incorporates some Chapter 11 concepts.
2.
Voluntary Filing Only. Relief under this chapter is "voluntary,
" meaning only the debtor may file a petition
for Chapter 12 bankruptcy relief.
3.
Debt Reorganization. Chapter
12 allows the family farmer to reorganize debts by
reducing secured debts to the present value of the
assets securing the debt and by extending the
repayment periods.
4.
Income Requirements. The
Bankruptcy Code provides only a family farmer, whose
annual income is sufficiently stable and regular to
enable the debtor to make payments under a Chapter
12 plan, is eligible to file this type of
bankruptcy. See 11 U.S.C. § 101(19).
5.
Debtor Operates Business. A debtor may continue to operate the farming
operation as a debtor-in-possession, with the duties
and rights of a trustee, unless the court, for
cause, appoints a trustee. 11 U.S.C. §§1203 and
1204.
25.17.12.3 (09-01-2004)
Chapter 12 Eligibility
1.
Eligibility.
To file a Chapter 12 bankruptcy proceeding, a debtor must:
A.
be an
individual, a partnership, or a corporation;
B.
have a
regular income;
C.
not have
debts exceeding $1,500,000; and
D.
have at
least 80 percent of total debts, excluding a home
mortgage, from farming operations.
2.
50 Percent Rule — Individuals. In
the tax year prior
to the petition, more than 50 percent of
income for an individual, or an individual and
spouse, must have come from farming operations.
3.
50 and 80 Percent Rules — Partnerships/Corporations.
A partnership or corporation must have more
than 50 percent ownership by one family, and
more than 80 percent of the value of its assets must
consist of farm-related property. See 11 U.S.C. §101(18),
(19), and (20).
25.17.12.4 (09-01-2004)
Preliminary Issues
1.
Initial Actions. Upon
notification of a Chapter 12 filing, Insolvency must
follow the processing procedures outlined in
2.
Adequate Protection. If
the
3.
Trust Fund Taxes . If trust fund liabilities are due, the
procedures in
25.17.12.5 (09-01-2004)
Chapter 12 Plans
1.
Timeframes.
A debtor is required to file a plan within 90 days
of the petition date. A confirmation hearing is to
be held within 45 days
of the plan filing. However, in practice, the date
for filing a plan is often extended. Plans range from
3 – 5 years .
2.
Notice to Creditors. Creditors
must be given at least 20
days prior notice of the confirmation
hearing.
3.
The Chapter 12 Plan. Insolvency
must secure a copy of the debtor’s plan and
schedules as soon as possible for evaluation. 11
U.S.C. §§ 1222 and 1225 deal with Chapter 12
plans. The debtor's plan must provide for payment of
the Service's claim as follows:
A.
full
payment of secured claims with post-confirmation
interest;
B.
full
payment of priority claims in deferred cash
payments; and
C.
payment of
general unsecured claims in an amount not less than
the
Note:
A unique feature of the Chapter 12 plan
allows plan payments to be due seasonally
when the debtor receives income (such as, after the
harvesting of crops).
25.17.12.5.1 (09-01-2004)
Plan Modification
1.
Modified Plans. On
occasion, changed circumstances necessitate the
debtor's modifying or amending a Chapter 12 plan
either before or after confirmation. Insolvency
should review a modification of a plan as carefully
as if it were the original plan.Insolvency
may confer with Counsel if plans require
clarification. An objection may be needed to protect
the government's interests.
25.17.12.6 (09-01-2004)
Reasons to Object to the Plan
1.
Plan Does Not Provide for
Note:
This recommendation may be made only if
no other creditor benefits to the detriment of the
Service. Additionally, under no circumstances will
the
2.
Decision Factors for Evaluating Deficient Plans.
3.
Acceptance of Deficient Plans. If
a debtor demonstrates agreeing to treatment
different than is statutorily required under the
Bankruptcy Code is in the government's best interest
in his case, the specific payment terms must be
incorporated into the debtor's plan of
reorganization and are subject to the approval of
the bankruptcy court. Provisions protecting the
government's rights to collect upon a default in
plan payments should be included in the terms of the
plan.
Note:
The AIS history must reflect the factors
considered in the decision to accept treatment of
the
4.
Prompt Objections. If debtor's counsel is unresponsive to
Insolvency contacts, unable to demonstrate the
government's best interest lies in agreeing to a
different treatment of its claims than is required
under the Bankruptcy Code, or the interests of the
government are at risk, Insolvency must refer the
case to Counsel to object to the plan.
5.
Contents of Objection Referral.
6.
Common Problems with Plans. The debtor may add provisions to a plan
adversely affecting the Service's position.
Insolvency should consult Counsel if the plan does
not appear to provide for the
A.
debtor does
not meet the requirements for a Chapter 12
bankruptcy;
B.
debtor is
not in compliance;
C.
the plan is
not feasible because payments to creditors provided
by the plan are more than the debtor can generate
after necessary living and operating expenses are
taken into account;
D.
the plan
proposes to discharge taxes not dischargeable under
the Bankruptcy Code;
E.
the plan
includes individual(s), other than the debtor, in
the discharge (for example, seeking a discharge of a
related Trust Fund Recovery Penalty for another
responsible party);
F.
the plan
allows the debtor to change provisions of the plan
affecting the payment of the Service's claim without
a court hearing, depriving the
G.
in lieu of
cash payments, the plan proposes to distribute
physical property to the
H.
the plan
allows for payments to be made outside
the plan;
I.
all of the
debtor’s disposable income is not committed to the
plan while the general unsecured tax claim will not
be paid in full under the plan;
J.
the plan
proposes a balloon payment at the end of the plan
instead of consistent regular payments throughout
the plan; and
K.
the plan
discriminates against the general unsecured claims
of the
25.17.12.7 (09-01-2004)
Chapter 12 "Pay-out" Arrangements
1.
Normal Range 3 – 5 Years. Chapter 12 plans can last for five years from
the date of the first payment; however, any time
period greater than three years must be approved by
the court. See 11 U.S.C. § 1222(c).
2.
Debtor's Disposable Income. All of the debtor’s disposable income must
be committed to the plan if unsecured claims are not
paid in full.
3.
Secured Claims and Collateral. The
time allowed for payment of secured claims must be
evaluated on the nature and worth of the collateral
securing the claim.
4.
When Property is Proposed as Payment. If
property, other than cash payments, is received as
part of the plan, Insolvency should follow
procedures in
Note:
An objection to the plan may be in order
if disposition of the property may be burdensome,
costly, and, overall not in the best interests of
the government. If an objection is warranted, it
must be filed in a timely fashion.
25.17.12.8 (09-01-2004)
Confirmation
1.
Court Confirms Plan. When
no objections are filed, or after objections are
resolved, the plan will be confirmed by the court.
The trustee or DIP then begins distribution of the
funds to the creditors. Once the court confirms the
plan, it is incumbent upon the debtor to make it
succeed.
25.17.12.9 (09-01-2004)
Monitoring Compliance
1.
Monitoring and Follow-up. Insolvency
must monitor the debtor’s compliance from the
petition date to the date the debtor’s case is
discharged, dismissed, converted, or closed.
A.
Insolvency
should establish a follow-up schedule to monitor
plan payments after confirmation or use AIS plan
reports.
B.
Systemic
monitoring for Forms 941 can be conducted in the
same manner as in Chapter 11 proceedings. See
C.
Manual
monitoring for Form 943 will be necessary. However,
the Last Return Amount Code (LRA-CD) may be input
with a TC 136 to cause postpetition Form 943
delinquencies to appear on the Postpetition
Monitoring Report.
D.
If the
debtor becomes delinquent in the plan payments,
Insolvency should contact the trustee, if one has
been appointed, or the debtor-in-possession to
determine the cause of the delinquencies/default.
E.
If the
debtor fails to comply with current filing and
payment requirements, Insolvency must advise the
debtor in writing
of the non-compliance and give
a deadline to come into full compliance.
25.17.12.9.1 (09-01-2004)
Referral to Counsel
1.
Serious Delinquencies. The
debtor may continue to incur significant
postpetition tax liabilities, or problems with
unfiled tax returns may continue. If the debtor is
not addressing these concerns or cannot resolve them
given present circumstances, Insolvency should take
appropriate actions to protect the government's
interests.
2.
Referral.
The debtor may have continuing non-compliance problems with plan provisions.
If the debtor's explanation for the delinquencies is
unsatisfactory, and the delinquencies are not cured,
Insolvency should consider a referral to Counsel.
The options generally available to the Service are
to have the debtor's case dismissed or to have the
stay lifted so administrative collection can be
pursued.
25.17.12.9.2 (09-01-2004)
After-Acquired Property
1.
Property of the Estate. Much of the property the debtor acquires after
the bankruptcy petition is filed becomes property of
the bankruptcy estate. Therefore, such property is
not subject to administrative collection. See 11
U.S.C. § 1207(a).
25.17.12.9.3 (09-01-2004)
Postpetition Liabilities in Chapter 12
1.
No Provision for Postpetition Tax Debts. Unlike
a Chapter 13 proceeding, no provision exists for
filing claims for postpetition taxes in a Chapter 12
bankruptcy.
2.
Refer for Dismissal. If
the debtor does not pay significant postpetition
liabilities timely, Insolvency should consider a
referral to have the bankruptcy dismissed. The
Service should make this decision early on; the
court is more inclined to grant a dismissal request
on a plan in its early stages, rather than to grant
a dismissal on an advanced plan.
25.17.12.10 (09-01-2004)
Dismissals
1.
Grounds for Dismissal. The
court's authority to dismiss is found in 11 U.S.C.
§ 1208(c), which provides such action may be taken
upon the request of a party in interest "for
cause," including nine specific grounds. The
more important ones are:
A.
failure to
begin making timely payments required by a confirmed
plan;
B.
gross
mismanagement by the debtor;
C.
material
default by the debtor with respect to the terms of a
confirmed plan; and
D.
unreasonable
delay by the debtor that is prejudicial to
creditors.
2.
"
Cause.
" Like any other party seeking
dismissal, the Service bears the burden of proof in
arguing sufficient "
cause" for dismissal. Courts have
broad discretion in determining what constitutes
"cause,"
but the most common reasons for dismissal cited by
the Service are: (1) the debtor's failure to pay
federal taxes in accordance with the terms of a
confirmed plan, and (2) the debtor's failure to stay
current on postpetition taxes.
Note:
If an objection to confirmation is
filed, upheld, and cannot be resolved, the case will
generally be dismissed by the court.
25.17.12.11 (09-01-2004)
Conversions
1.
Conversion Only for Fraud. Unlike Chapters 11 and 13, Chapter 12 does not
permit conversion to Chapter 7 unless the debtor has
committed fraud in
connection with the case. 11 U.S.C. § 1208(d).
Referrals in a Chapter 12 proceeding, therefore,
will usually request motions for dismissal
rather than for conversion.
25.17.12.12 (09-01-2004)
Discharge
1.
Granting of Discharge. The
court will grant the debtor a discharge when the
debtor’s plan is completed.
25.17.12.13 (09-01-2004)
Hardship Discharge
1.
Granting of Hardship Discharge. If
the court determines circumstances beyond the
debtor's control have created a true hardship, such
as crop failure or illness, a discharge may be
issued prior to completion of the plan. See 11 U.S.C.
§ 1228(b)(1).
25.17.12.14 (09-01-2004)
Exceptions from Discharge
1.
No Superdischarge. Unlike
Chapter 13, Chapter 12 contains no "superdischarge
" provision.
2.
Discharge Exceptions. All
tax liabilities excepted from discharge in a Chapter
7 bankruptcy are also excepted from discharge in an
individual Chapter 12 bankruptcy. These exceptions
can be found in 11 U.S.C. § 523(a).
25.17.12.15 (09-01-2004)
Revocation — Fraud
1.
Timeframe.
A discharge can be denied or revoked by the bankruptcy court within
one year of
the original discharge order when the discharge was
secured by fraud.
11 U.S.C. § 1228(d).