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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 IRM 25.17.5, Opening a Bankruptcy Case.

2.       Adequate Protection. If the IRS has a significant secured claim, Insolvency must evaluate adequate protection potential to determine if the IRS has an interest in the debtor’s cash collateral. Such actions are discussed in IRM 25.17.11.3.2, Adequate Protection and Turnover, and IRM 25.17.11.3.3, Cash Collateral/Property Depreciation of the Estate.

3.       Trust Fund Taxes . If trust fund liabilities are due, the procedures in IRM 25.17.3.9, Trust Fund Recovery Penalty, are to be followed. IRM 25.17.7.12 also provides information concerning trust fund liabilities.

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 IRS would receive in a Chapter 7 liquidation.

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 IRS . If the plan does not provide for appropriate payment of the Service's claims, Insolvency should contact debtor's counsel to discuss the plan deficiencies. If the debtor can demonstrate acceptance of a deficient plan is in the best interests of the government, the case should be referred to Counsel recommending acceptance of the plan in lieu of objection. The referral must include the debtor's TIN (s).

Note:

This recommendation may be made only if no other creditor benefits to the detriment of the Service. Additionally, under no circumstances will the IRS accept less than would be recoverable in a Chapter 7 case.

2.       Decision Factors for Evaluating Deficient Plans. IRM 25.17.13.5.5(6) lists the types of factors to consider when determining if the IRS should agree to treatment of its claims that provides less than is required by the Bankruptcy Code.

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. IRM 25.17.13.5.5(7) outlines other requirements for deficient plan provisions.

Note:

The AIS history must reflect the factors considered in the decision to accept treatment of the IRS 's claims irrespective of Bankruptcy Code requirements.

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. IRM 25.17.13.5.5(9) explains information needed on the referral to Counsel objecting to a deficient plan.

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 IRS 's claim. Common reasons for the Service's objection to a Chapter 12 plan include:

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 IRS of an opportunity to object;

G.     in lieu of cash payments, the plan proposes to distribute physical property to the IRS in payment of the IRS 's claim. See 11 U.S.C. § 1222(b). See IRM 25.17.12.7(4), When Property is Proposed as Payment;

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 IRS by proposing to pay a larger percentage of the general unsecured claims of other creditors.

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 IRM 25.17.11.7.1, Disposition of Acquired Property.

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 IRM 25.17.11.3.6, Compliance Monitoring.

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).