Saving real property from foreclosures
Chapter 12 enables farmers and fishermen debtors, both individuals and businesses alike, to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.
To be eligible for Chapter 12, a debtor must have regular annual income, as well as debts that do not exceed the debt limits set by the bankruptcy law, which are much more generous than the debt limits for Chapter 13 and subchapter 5 cases. For farming operations, the aggregate debt limit is $10,000,000. And, for fishing operations, the aggregate debt limit is $2,044,225. Also, for business Chapter 12 cases, the business cannot be publically traded, must be at least 50% family owned and operated, and more than 80% of the business assets must relate to the farming/fishing operation. And, for individual Chapter 12 cases, at least 50% of one’s income must come from the farming/fishing operation, and the debts must generally arise therefrom. Specifically, for individual farmers, more than 50% of their debt (excluding residential mortgages) must arise out of the farming operation. And, for individual fishermen, more than 80% of their debt (excluding residential mortgages) must arise out of the farming operation.
While the case is pending, the debtor remains in exclusive possession and control of all property of the estate, and is empowered to use, sell or lease such property, even outside the ordinary course of business upon Court approval. A trustee is automatically appointed to all Chapter 13 cases. The trustee is charged with, among other things, investigating the debtor’s financial affairs, facilitating plan confirmation and act as disbursing agent for certain of the debtor’s plan payments. There is a co-debtor stay.
In a Chapter 12, the debtor has perpetual exclusivity to file a plan, and must do so within 90 days of the date of the petition date. Creditors do not vote to confirm a Chapter 12 plan. Instead, creditors receive notice of the confirmation hearing and are afforded the right to object. Generally, to achieve court approval (confirmation), the plan must, among other things:
- Be proposed in good faith
- Be feasible
- Provide that all priority unsecured claims are paid in full over the 3-5 year plan term (e.g. recent taxes, domestic support obligations, administrative claims, etc.)
- Satisfy the “Best Interest Test” by providing that general unsecured claims are to be paid at least what they would receive in a hypothetical Chapter 7 liquidation
- Satisfy the “Best Efforts Test” by providing that general unsecured claims are to be paid at least all of the debtor’s projected disposable income over the 3-5 year plan term
And finally, once the debtor completes all plan payments, the court will grant a discharge.