VII. THE PLAN OF REORGANIZATION
Similar to a Chapter 13 case, only the debtor in a Chapter 12 case may file a plan of reorganization. The debtor's plan must be filed not later than 90 days after the entry of the order for relief, but the court may extend the period for filing the plan if an extension is substantially justified. See 11 U.S.C. § 1221. There are no clear guidelines for determining substantial justification; however, debtors should approach Chapter 12 with the expectation that such an extension of time will not be granted. The 90-day time limit is one of the provisions of Chapter 12 that protects a creditor's interest, and it is likely that the threshold for substantial justification will be high. Failure to file a plan in a timely manner under Section 1221 is grounds for dismissal of the debtor's case. See 11 U.S.C. § 1208(c)(3). No disclosure statement is required in cases under Chapter 12.
A. Provisions of the Plan
The plan may provide for payments at least over a period of three years or, if the court approves for cause, a longer period of up to five years. 11 U.S.C. § 1222(c). Pursuant to Section 1222(a), a Chapter 12 debtor's plan must:
(1) provide for the submission of all of the debtor's future earnings or future income to the supervision and control of the trustee, or such portion as is necessary to execute the debtor's plan;
(2) provide for full payment, in deferred cash payments (inclusion of interest is not required), of all priority claims under Section 507, unless a holder of a priority claim agrees to different treatment; provided, however, a claim under a domestic support order entitled to priority may not be required to be paid in full if all of the debtor's net disposable income is paid into the plan for a period of five years; and
(3) provide for the same treatment of each claim or interest within a class if the debtor's plan classifies claims and/or interests
(a) unless the holder of a particular claim or interest agrees to less favorable treatment; or
(b) the claim is held by a governmental unit and results from the sale, transfer, exchange or other disposition of a farm asset used in the debtor's farming operation, in which case the claim shall be treated as unsecured only if the debtor receives a discharge (Section 1222(a)(4) regarding change in capital gains treatment).
11 U.S.C. § 1222(a)(1), (2), (4).
As noted above and pursuant to Section 1222(a)(2), in order to be confirmed, a Chapter 12 plan must provide for Section 507 priority claims to be paid in full (unless otherwise agreed or for a domestic support order under the five year net disposable income payment exception), but the claims may be paid in deferred cash payments, not including interest, over the life of the plan, which is from three to five years. There are two exceptions under Section 1222(a)(2). The first exception is if the holder of the claim agrees to accept less favorable treatment and the second exception concerns a claim owed to a governmental unit that arises as the result of a sale or other disposition of a farm asset used in the debtor's farming operation. Any such claim shall be treated as an unsecured claim not entitled to priority under Section 507, but only if the debtor receives a discharge. In Knudsen v. Internal Revenue Service, 581 F.3d 696 (8th Cir. 2009), the court held revenues arising from the sale of debtor's slaughter hogs came within the scope of Section 1222(a)(2)(A). The Knudsen decision held that capital gains taxes incurred after the petition date were covered by Section 1222(a)(2)(A). See also United States v. Nazar (In re Dawes), 415 B.R. 815 (Bankr. D. Kan. 2009), rev'd United States v. Dawes (10th Cir. 2011) and Hall v. United States (In re Hall), 393 B.R. 857 (Bankr. D. Ariz. 2008). As discussed above, Knudsen, Dawes and Hall have all been abrogated by Hall v. United States, 566 U.S. 506, 132 S. Ct. 1882 (2012). Capital gains taxes are not incurred by the bankruptcy estate when assets are sold pre-petition.
Additionally, the Chapter 12 plan may designate a class or classes of unsecured claims. Although the plan may not discriminate unfairly against any designated class, it may treat claims for consumer debts on which a co-debtor is liable with the debtor differently from other unsecured claims. 11 U.S.C. § 1222(b)(1).
Pursuant to Section 1222(b)(2), the debtor's plan may modify the rights of holders of either secured claims or unsecured claims or may leave such rights unaffected. Notably, unlike Section 1322(b)(2), which applies to Chapter 13 cases, Section 1222(b)(2) does not prohibit the modification of a claim secured only by a lien on the debtor's principal residence; therefore, a Chapter 12 debtor may modify the rights of a secured creditor holding a claim secured only by a lien on the debtor's residence. This modification may prove of significant benefit to Chapter 12 debtors because often one of the primary objectives of a typical farmer is to retain the family home.
Provisions in a Chapter 12 plan for the curing of default are generous to the debtor. Pursuant to Section 1222(b)(3), the plan may provide for the curing or the waiving of any default, and payments on any unsecured claim may be made concurrently with payments on any secured or other unsecured claim. Additionally, the...
