§ 147.2     Incentives to Convert to Chapter 12 after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 147.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA did not change the rule that a Chapter 13 case can convert to Chapter 12 at any time before confirmation.1 As discussed above,2 the cross-reference in the first sentence of § 1307(d) to “subsection (e) of this section” probably should be corrected to read “subsection (f)” after BAPCPA re-lettered the subsections of § 1307. Former subsection (e), now subsection (f), provides that the court may not convert a case from Chapter 13 to Chapter 12 “if the debtor is a farmer, unless the debtor requests such conversion.”3

[2]

BAPCPA enlarged the class of entities eligible for Chapter 12 and increased slightly the pool of Chapter 13 debtors that will be eligible for conversion to Chapter 12. Under § 109(f), a “family fisherman” with regular income is eligible for Chapter 12 together with family farmers. “Family fisherman” is defined in § 101(19A) to include individuals, corporations and partnerships with aggregate debts less than $1,500,000 that received more than 50 percent of gross income from a commercial fishing operation during the preceding taxable year and with respect to which 80 percent of aggregate noncontingent, liquidated debt—sometimes excluding debt on a principal residence—arises out of a commercial fishing operation.4

[3]

BAPCPA also amended the definition of “family farmer” in § 101(18)(A) to increase from $1,500,000 to $3,237,000 the aggregate debt limitation for Chapter 12. The percentage of aggregate noncontingent, liquidated debt that must arise out of a farming operation was reduced from 80 percent to 50 percent. The year for measuring whether 50 percent of the debtor’s gross income arose from a farming operation was more flexibly redefined as the taxable year preceding the filing or each of the second and third taxable years preceding the taxable year in which the case was filed.5

[4]

For many of the reasons discussed above with respect to conversion from Chapter 13 to Chapter 11,6 conversion from Chapter 13 to Chapter 12 after BAPCPA is a mixed bag for debtors. The tension between new § 348(f)(1)(B) and (C) is at work at conversion from Chapter 13 to Chapter 12.

[5]

Under new § 348(f)(1)(B), at conversion from Chapter 13 to Chapter 12, valuations of property and of allowed secured claims apply in the converted case and allowed secured claims are reduced to the extent that they were paid in accordance with the Chapter 13 plan.7 But § 348(f)(1)(C) then provides that the claim of any creditor with security at the Chapter 13 petition continues to be secured by that security at conversion from Chapter 13 to Chapter 12 unless the full amount of the debt “determined under applicable nonbankruptcy law” was paid in full before conversion—“notwithstanding any valuation or determination of the amount of an allowed secured claim made for the purposes of the case under chapter 13.”8

[6]

New § 348(f)(1)(C)(i) can be interpreted to take away some of the benefits debtors receive under new § 348(f)(1)(B) at conversion from Chapter 13 to Chapter 12. Any undersecured claim that was valued, bifurcated and/or crammed down during the Chapter 13 case would remain so after conversion, but the lienholder’s debt continues to be “secured” to the full extent of the collateral unless the entire debt was paid before conversion. These two outcomes are not completely compatible.9

[7]

Under new § 348(f)(1)(C)(ii), unless a prebankruptcy default was fully cured before conversion, after conversion from Chapter 13 to Chapter 12, the default “shall have the effect given under applicable nonbankruptcy law.” Because conversion to Chapter 12 from Chapter 13 is only allowed before confirmation, it is unlikely that prepetition defaults will be fully cured when a Chapter 13 case converts to Chapter 12.

[8]

At conversion from Chapter 13 to Chapter 12, valuations of property and of allowed secured claims during the Chapter 13 case apply and allowed secured claims are reduced to the extent paid in accordance with the Chapter 13 plan before conversion. To make sense of this—given that conversion from Chapter 13 to Chapter 12 must be before confirmation—in accordance with the Chapter 13 plan” may be interpreted to include preconfirmation payments to secured claim holders.10

[9]

But the potential conflict with new § 348(f)(1)(C)(i) remains: lienholders not paid in full before conversion will claim that the collateral continues to secure the entire debt after conversion to Chapter 12, notwithstanding that some or all of the allowed secured portion of the debt was paid during the Chapter 13 case before conversion.11 There is a comment in House Report No. 109-31 that the continuation of security described in new § 348(f)(1)(C)(i) applies only when a Chapter 13 case is converted to Chapter 7.12 The statute is not written that way.

[10]

It should be mentioned that Chapter 12 was not amended by BAPCPA to create special treatment for 910-day PMSI car claims and other secured debts described in the hanging sentence at the end of § 1325(a).13 BAPCPA dangled a sentence at the end of § 1325(a) which provides that § 506 shall not apply to purchase money security interests in a car when the debt was incurred for personal use of the debtor within 910 days of the petition or to claims secured by any other thing of value incurred within a year of the petition. This special treatment complicates the management of 910-day PMSI car claims and debts secured by other things of value incurred within a year of the petition in a Chapter 13 case.

[11]

But after conversion, there is no provision of Chapter 12 similar to the hanging sentence in § 1325(a). That valuations of property or allowed secured claims during the Chapter 13 case apply at conversion to Chapter 12 under new § 348(f)(1)(B) may not impact 910-day PMSI car claims and debts secured by any other thing of value incurred within a year of the petition because § 506 did not apply to those claims during the Chapter 13 case. After conversion to Chapter 12, debtors should be able to value and cram down claims that received special treatment during the Chapter 13 case under the dangling sentence at the end of § 1325(a).

[12]

Other potential benefits to debtors of conversion to Chapter 12 from Chapter 13 for those few who are eligible are the absence from Chapter 12 of any mention of current monthly income (CMI) and the absence of any cross-reference to the “abuse” test in § 707(b). BAPCPA amended Chapter 13 to require debtors with CMI greater than applicable median family income to run the § 707(b)(2)(A) and (B) gauntlet to determine “amounts reasonably necessary to be expended—” for purposes of the disposable income test in § 1325(b)(2).14 There are no similar amendments to Chapter 12. Disposable income under § 1225(b)(2) is slightly modified by BAPCPA to account for a domestic support obligation that first becomes payable after the petition,15 but CMI and § 707(b)(2) are missing from the tests for confirmation of a Chapter 12 plan.

[13]

The potential conflicts between § 348(f)(1)(B) and (C) come into focus if a Chapter 13 case is converted to Chapter 12 and then further converted to Chapter 7.16 Valuations of property and of allowed secured claims during the Chapter 13 case apply in the Chapter 12 case after conversion from Chapter 13 under § 348(f)(1)(B), with allowed secured claims reduced to the extent paid in accordance with the Chapter 13 plan. What happens to those reduced allowed secured claims at conversion to Chapter 7 when the debtor proposes to redeem the collateral under § 722?

[14]

Under new § 348(f)(1)(C)(i), the claim of a creditor continues to be secured unless the full amount of the debt was paid prior to conversion from Chapter 13 to Chapter 12. Does that continuing lien mean that the allowed secured claim for purposes of redemption under § 722 at further conversion from Chapter 12 to Chapter 7 changes the allowed amount of the secured claim for redemption purposes? Or was the allowed secured claim determined once and for all during the Chapter 13 case—and reduced by payments during the Chapter 13 case—because of new § 348(f)(1)(B)? Creditors will argue under new § 348(f)(1)(C)(i) that the lien continues to “secure” even the unsecured portion of the debt for purposes of § 722 after conversion from Chapter 12 to Chapter 7.

[15]

It should be noted that there is no provision in § 348(f) similar to subparagraph (C) with respect to cases converted from Chapter 12 (or Chapter 11) to Chapter 7. In other words, Congress focused in BAPCPA on “continuing” the lien of a secured creditor at conversion from Chapter 13 to Chapter 7 notwithstanding payment of an allowed secured claim during the Chapter 13 case, but there was no similar attention given to conversion from Chapter 12 (or Chapter 11) to Chapter 7. This suggests a different outcome is appropriate.

[16]

There is no bankruptcy rule prescribing the effects of conversion from Chapter 13 to Chapter 12 on deadlines for such things as the filing of a complaint objecting to the dischargeability of debt. After BAPCPA, debts that might be nondischargeable under § 523(a)(2) and (a)(4) are subject to the deadline in Interim Rule 4007(c) that a complaint must be timely filed no later than 60 days after “the first date set for the meeting of creditors under section 341(a).”17 Does that 60-day period recommence when a Chapter 13 case is converted to Chapter 12?

[17]

The issue didn’t arise prior to BAPCPA because the so-called “fraud” exceptions to discharge in § 523(a)(2), (4) and (6) did not apply at the completion of payments under a Chapter 13 plan.18 BAPCPA added § 523(a)(2) and (a)(4) as exceptions to discharge at the completion of payments under § 1328(a).19 Debts nondischargeable under § 523(a) are nondischargeable in Chapter 12 cases before and after BAPCPA. The addition of § 523(a)(2) and (a)(4) to the exceptions to discharge in full-payment Chapter 13 cases raises for the first time the possibility that a nondischargeable claim holder’s failure to timely file a complaint under Bankruptcy Rule 4007(c) during the Chapter 13 case could preclude that complaint after conversion to Chapter 12.

[18]

Debtors will argue that the first date set for the meeting of creditors in Bankruptcy Rule 4007(c) is the meeting of creditors in the Chapter 13 case, and once that 60-day period has run, conversion to Chapter 12 does not start a second period for the filing of dischargeability litigation under § 523(a)(2) or (a)(4). The creditor holding a debt that might be nondischargeable under § 523(a)(2) or (a)(4) will point out that there is a meeting of creditors in the Chapter 12 case after conversion that triggers a new 60-day period under Bankruptcy Rule 4007(c).

[19]

That Bankruptcy Rule 1019(2) specifically provides a new period for objecting to the dischargeability of a debt under § 523(a)(2) or (a)(4) at conversion from Chapter 13 to Chapter 7 and there is no similar provision at conversion from Chapter 13 to Chapter 12 supports the debtor’s position. On the other hand, the policy arguments that disfavor starting a new time period under Bankruptcy Rule 4007 when a prior 60-day period expired during a Chapter 7 case are less inspiring when a Chapter 13 case converts to Chapter 12. To encourage resolution of nondischargeability disputes without litigation through the plan in a Chapter 13 (Chapter 11 or Chapter 12) case, the rule would reopen the window for timely filing complaints at conversion from Chapter 13 to Chapter 12. This is a vacuum ripe for a rule that specifies whether the deadline for filing a complaint objecting to dischargeability under § 523(a)(2) or (a)(4) restarts at conversion from Chapter 13 to Chapter 12.


 

1  11 U.S.C. § 1307(d), discussed in § 323.1 [ Standing, Procedure and Strategic Considerations ] § 147.1  Standing, Procedure and Strategic Considerations.

 

2  See § 536.1 [ New Incentives to Convert to Chapter 11 ] § 146.3  Incentives to Convert to Chapter 11 after BAPCPA.

 

3  11 U.S.C. § 1307(f).

 

4  11 U.S.C. § 101(19A).

 

5  See 11 U.S.C. § 101(18)(A).

 

6  See § 536.1 [ New Incentives to Convert to Chapter 11 ] § 146.3  Incentives to Convert to Chapter 11 after BAPCPA.

 

7  See 11 U.S.C. § 348(f)(1)(B), discussed in §§ 533.1 [ Lienholders’ Rights at Conversion under § 348(f) ] § 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA and 536.1 [ New Incentives to Convert to Chapter 11 ] § 146.3  Incentives to Convert to Chapter 11 after BAPCPA.

 

8  11 U.S.C. § 348(f)(1)(C)(i), discussed in § 536.1 [ New Incentives to Convert to Chapter 11 ] § 146.3  Incentives to Convert to Chapter 11 after BAPCPA.

 

9  See § 536.1 [ New Incentives to Convert to Chapter 11 ] § 146.3  Incentives to Convert to Chapter 11 after BAPCPA.

 

10  See discussion in § 536.1 [ New Incentives to Convert to Chapter 11 ] § 146.3  Incentives to Convert to Chapter 11 after BAPCPA.

 

11  See discussion of new 11 U.S.C. § 348(f)(1)(C)(i) in § 533.1 [ Lienholders’ Rights at Conversion under § 348(f) ] § 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.

 

12  See H.R. Rep. No. 109-31, at 85, discussed in § 533.1 [ Lienholders’ Rights at Conversion under § 348(f) ] § 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.

 

13  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

14  See discussion beginning at § 94.1  Big Picture: Too Many Issues and § 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60 and § 98.1  Additional Expenses or Adjustments to CMI.

 

15  See 11 U.S.C. § 1225(b)(2)(A).

 

16  See § 539.1 [ Reconversion to or from Chapter 13 ] § 150.2  Reconversion to Chapter 13 after BAPCPA.

 

17  See § 544.1 [ Time for Determining Dischargeability of Debt ] § 156.3  Time for Determining Dischargeability of Debt.

 

18  See § 344.1 [ Broadest Discharge Available ] § 157.1  Broadest Discharge Available.

 

19  11 U.S.C. § 1328(a), discussed in § 157.2  BAPCPA Shrank the Discharge§ 159.2  False Representations and Fraud: § 523(a)(2) and § 159.3  Fraud and Defalcation: § 523(a)(4).