CHAPTER 12 BANKRUPTCY
BANKRUPTCY OVERVIEW
Chapter 12 bankruptcy is a relatively new addition to the bankruptcy laws. It allows “family farmers” and “family fishermen” to restructure their finances and avoid liquidation or foreclosure. It’s very similar to Chapter 13 bankruptcy, but provides additional benefits to debtors.
CONFIRMATION OF THE CHAPTER 12 PLAN
Chapter 12 plans are subject to bankruptcy court approval, or “confirmation.” The hearing on confirmation is supposed to be held within 45 days of the date that the plan is filed. Before the confirmation hearing, the Chapter 12 trustee reviews the proposed plan and other documents filed by the debtor and makes recommendations to the bankruptcy court. The bankruptcy court is responsible for deciding whether to confirm a proposed Chapter 12 plan, but most judges rely heavily on the trustee’s recommendations.
ELEMENTS OF A CHAPTER 12 PLAN
Here are the basic parts of a Chapter 12 repayment plan:
Required plan payments. During the plan period, the debtor must turn over all of his or her “disposable income” to the Chapter 12 trustee. “Disposable income” in a Chapter 12 case is the difference between the revenue generated by the debtor’s farm or fishing operations and the amount reasonably needed to cover:
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business expenses, and expenses incurred in the maintenance and support of the debtor’s family.
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The trustee retains a fee from the plan payments and disburses the balance to creditors.
Mortgages and other secured claims. One of the advantages of Chapter 12 is that it allows debtors to “cram down” secured debt, like farm mortgages and boat loans. Mortgage lenders and other secured creditors must be paid at least the value of the collateral pledged for the debt. Any balance owed in excess of the collateral’s value can be treated as unsecured debt, which is often paid little or nothing in Chapter 12 cases. Payments on secured debt can be stretched out even beyond the term of the plan, and interest can be reduced to a current market rate.
Discharge of debt. Chapter 12 plans have to meet the “best interests of creditors” test. Under the “best interests” test, creditors have to be paid at least as much under a Chapter 12 plan as they would receive in a Chapter 7 bankruptcy liquidation. As long as the “best interests” test is met, unsecured creditors can be paid pennies on the dollar or even nothing at all.
THE END OF THE CASE
After the confirmation hearing, the case remains open until the debtor makes all required payments to the Chapter 12 trustee. Once all required payments have been made, the court grants the debtor a discharge, and the case is closed. A discharge, with some exceptions, eliminates a debtor’s liability for obligations not covered by its Chapter 12 plan. Most obligations are dischargeable. There are, however, some obligations, such as child support and alimony, that are non-dischargeable even under Chapter 12.
A Chapter 12 case can be dismissed if the debtor cannot obtain plan confirmation or make required payments. A debtor also can elect to dismiss a Chapter 12 case or convert it to a Chapter 7 liquidation.
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Chapter 7 Bankruptcy Costs in Time and MoneyThe whole Chapter 7 bankruptcy process takes approximately four months, costs $335 in court filing fees, and requires only one Zoom video meeting with your bankruptcy trustee. You must also complete credit counseling with an agency approved by the United States Trustee. We will give you this credit counseling information when you talk with us.
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Who Can File for Chapter 7 Bankruptcy?You won't be able to use Chapter 7 bankruptcy if you already received a bankruptcy discharge in the last six to eight years (depending which type of bankruptcy you filed) or if, based on your income, expenses, and debt burden, you could feasibly complete a Chapter 13 repayment plan. Our attorneys can explain more about the Chapter 7 eligibility requirements.
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Bankruptcy's Magic Wand -- The Automatic StayFiling for Chapter 7 bankruptcy puts into effect something called the "automatic stay." The automatic stay immediately stops creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot legally grab ("garnish") your wages, empty your bank account, go after your car, house, or other property.
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Bankruptcy Court's Control Over Your Financial AffairsBy filing for Chapter 7 bankruptcy, you are technically placing the property you own and the debts you owe in the hands of the bankruptcy court. You can't sell or give away any of the property you own when you file, or pay off your pre-filing debts, without the court's consent. However, with a few exceptions, you can do what you wish with property you acquire and income you earn after you file for bankruptcy.
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The Bankruptcy Trustee for Chapter 7 BankruptcyThe court exercises its control through a court-appointed person called a "bankruptcy trustee." The trustee's primary duty is to see that your creditors are paid as much as possible of what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid. The trustee (or the trustee's staff) will examine your papers to make sure they are complete and to look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.
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The Creditors MeetingA week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a "creditors meeting" has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 bankruptcies, this is all done by Zoom video so you do not have to go anywhere in person. Also, usually no creditors show up to this meeting.
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What Happens to Your PropertyIf, after the creditors meeting, the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee may "abandon" the property -- which means that you get to keep it, even though it is nonexempt. However, which property is exempt varies by state. Our attorneys can tell you which assets are exempt and which assets are not in Mississippi. Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt. To get a better understanding of what may happen to your property in bankruptcy, give us a call.
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How Your Secured Debts Are TreatedIf you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you're behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before. If a creditor has recorded a lien against your property because of a debt you haven't paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy. Get in-depth information on how your secured debts are handled with one of our experienced attorneys.
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The Chapter 7 Bankruptcy DischargeAt the end of the bankruptcy process, all of your debts are wiped out (discharged) by the court, except: debts that automatically survive bankruptcy, such as child support, most tax debts, student loans, and criminal fines, and debts that the court has declared nondischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).
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