Chapter 12: Not Your Average Bankruptcy Case
Many Rubin Lublin clients have an extensive understanding of the workings of bankruptcy filings under Chapters 7 and 13, and often create specialized departments to handle the more complex Chapter 11 filings. But the rare Chapter 12 case can cause some confusion amongst creditors, and even many practitioners less familiar with the chapter’s code provisions. In recent years, Rubin Lublin has seen a rise in Chapter 12 filings, especially considering the large agricultural demographic of the southern states we serve.
Chapter 12 was added to the Bankruptcy Code by the Family Farmer Bankruptcy Act of 1986. Congress created Chapter 12 relief for family farmers or fishermen with regular, annual income. Chapter 12 provides tailored code provisions that offer the streamlined approach of a Chapter 13, unlike the more complex and costly Chapter 11 option better suited for large corporate entities, with added benefits for qualifying individuals beyond what Chapter 13 offers for regular wage earners. This chapter provides relief to both individuals (and their spouse, if applicable) like a Chapter 13, as well as to a corporation or partnership previously included under the Chapter 11 umbrella.
Like its Chapter 13 counterpart, a Chapter 12 plan runs for three (3) or five (5) years and proposes to cure delinquent debts during this period. The Chapter 12 plan may also restructure debts, particularly secured debts. Unlike a Chapter 13 where modified secured debts are paid within the plan period, a modified secured debt under Chapter 12 can be paid out over a period longer than the Chapter 12 plan period. Further, many clients and unsuspecting practitioners fail to realize that the Chapter 12 debtor is also capable of modifying most secured debts – even debts secured by the debtor’s personal residence. This is starkly different than the anti-modification provisions found in both Chapters 11 and 13 that prevent modification of debts secured by the debtor’s personal residence.
Additionally, there is a co-debtor stay imposed by the filing of the Chapter 12 petition that operates like the co-debtor stay in a Chapter 13, making relief from the automatic stay more complex than in Chapter 11. Because there is an independent Chapter 12 trustee appointed to oversee the case, a secured creditor subject to Chapter 12 plan repayment may have more difficulty seeking relief from the stay upon confirmation of the plan, which is often obtained in the Chapter 11 context by operation of law or agreement. For secured creditors in Chapter 12, servicing of a loan post-confirmation may prove especially challenging given that the account may be subject to payout from an independent trustee for prepetition debt repayment as well as modified repayment terms of the ongoing obligation – and, this may be further complicated by the need to seek post-petition relief on default under the terms of the plan and not the underlying loan documents.
Qualified counsel can help navigate the nuances of Chapter 12 cases and should always be consulted when a creditor receives notice that a borrower has filed for relief under this rare and often misconceived chapter of the Bankruptcy Code. In today’s market, failure to defend a bankruptcy claim properly can result in the loss of tens of thousands of dollars. Even where loss seems guaranteed, counsel can help mitigate any threat of loss by having a full understanding of Chapter 12.