Benefits of a Chapter 12 Over Chapter 13 or Chapter 11

Benefits of a Chapter 12 Over Chapter 13 or Chapter 11

Bankruptcy LawChapter 12 Bankruptcy – Benefits of a Chapter 12 Over Chapter 13 or Chapter 11

Benefits of a Chapter 12 Over Chapter 13 or Chapter 11

A family farmer or commercial fisherman may file a Chapter 13 or Chapter 11 case, but a Chapter 12 case offers many benefits that the other two chapters do not offer.

One of the biggest advantages that a Chapter 12 offers is that the primary mortgage on the debtor’s residence can be lowered through a process called cram down. In a cram down, the secured portion of the claim is crammed down to the home’s present value. The mortgage then becomes divided between a secured claim based on the present value of the home, and the remainder of the mortgage becomes an unsecured claim that can be discharged at the end of the case. A cram down works if the house has gone down in value since it was purchased. None of the other bankruptcy chapters offer this benefit of the ability to lower the primary mortgage on one’s home. Secured claims on other assets can be similarly crammed down.

Secondly, unlike a Chapter 11 debtor that needs to meet all sorts of requirements to sell assets free and clear of liens, claims, and other encumbrances, a Chapter 12 debtor may sell any property free and clear of liens as long as that property is farmland or farming equipment. And while any capital gains tax incurred from a profit of the sale of such property is treated as a priority claim that must be paid in Chapter 11, in a Chapter 12, the tax debt is treated as a dischargeable unsecured claim.

Third, unlike Chapter 11, there is no creditor’s committee in Chapter 12 with voting rights regarding the confirmation of the Plan. Fourth, the adequate protection standard for secured creditors in Chapter 12 is different than the other 2 chapters. In Chapter 12, adequate protections payments are based on the current market rent for use of farmland.

Moreover, unlike Chapter 13, the Chapter 12 debtor does not need to start making Plan payments 30 days after the Plan is filed. Plan payments under Chapter 12 can be adjusted to a farmer’s seasonal income.

Finally, unlike Chapter 11, there is no absolute priority rule in a Chapter 12 bankruptcy. There is no rule requiring classes of claims to be paid in order for the family farmer to keep his farmland.

Click here for an explanation of how the absolute priority rule works in a Chapter 11 Plan

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