Chapter 12 Discharge
After completing all payments under the Chapter 12 plan, the debtor receives a Chapter 12 discharge. The discharge will ultimately release the debtor’s obligation to pay unsecured debts that were included in a repayment plan. The debtor must certify (if applicable) that all domestic support obligations that came due before making such certification have been paid.
How Chapter 12 Works
Chapter 12 bankruptcy permits debtors to make installment payments to creditors over a three to five year period. Chapter 12 is meant for family farmers or family fishermen with regular income to repay their debts over time. A farmer or fisherman can attempt to restructure its debt in order to keep his or her farm or boat. This restructure is important because it allows the debtor to operate his or her business since he or she is still in possession. The court must approve a repayment plan if it is to be effective.
Effect of the Chapter 12 Discharge
The discharge has the effect of releasing the debtor from all debts provided for by the plan allowed under section 503 or disallowed under section 502, with limited exceptions. Those creditors who were provided for in full or in part under the plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations. However, creditors are permitted to object to the confirmation of the repayment plan but not the discharge.
Certain categories of debts are not discharged in Chapter 12 proceedings. Those categories include
- Debts for alimony and child support;
- Money obtained through filing false financial statements;
- Debts for willful and malicious injury to person or property;
- Debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated; and
- Debts from fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.
The bankruptcy law regarding the scope of a Chapter 12 discharge is complex, however, and debtors should consult competent legal counsel in this regard prior to filing. Those debts, which will not be discharged should be paid in full under a plan. With respect to secured obligations, those debts may be paid beyond the end of the plan payment period and, accordingly, are not discharged.
The Chapter 12 Discharge for Hardship
The court may grant a "hardship discharge" to a Chapter 12 debtor even though the debtor has failed to complete plan payments. Generally, a hardship discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor's control and through no fault of the debtor. Creditors must have received at least as much as they would have received in a Chapter 7 liquidation case, and the debtor must be unable to modify the plan. For example, injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge does not apply to any debts that are nondischargeable in a Chapter 7 case.
Consider talking to a bankruptcy attorney if you have additional questions about the Chapter 12 discharge.