§ 147.1 — Standing, Procedure and Strategic Considerations

Revised: June 16, 2004

[1]

At any time before confirmation, a Chapter 13 case can be converted to Chapter 12 on the request of a party in interest or the U.S. trustee.1 If the debtor is a farmer, the case can be converted to Chapter 12 only at the request of the debtor.

[2]

Conversion from Chapter 13 to Chapter 12 is motion practice governed by Bankruptcy Rule 9014.2 Conversion from Chapter 13 to Chapter 12 is not automatic—§ 1307(d) states that the court “may” convert a case from Chapter 13 to Chapter 12 “on request of a party in interest or the United States trustee.” There are no reported decisions suggesting standards for conversion from Chapter 13 to Chapter 12.3

[3]

Eligibility for Chapter 12 is limited to debtors that satisfy the definition of “family farmer” in 11 U.S.C. § 101(18). “Farmer” is a term of art defined in 11 U.S.C. § 101(20). The definition of farmer is not coextensive with the definition of family farmer. There will be Chapter 13 debtors who are family farmers for purposes of eligibility for Chapter 12 but who are not farmers for purposes of the protection from involuntary conversion to Chapter 12.4 The Chapter 13 debtor that satisfies the definition of family farmer without satisfying the definition of farmer would be exposed to involuntary conversion to Chapter 12. This is a very narrow class of debtors—individuals within the Chapter 13 debt limitations who meet the 50 percent income from farming requirement to be a family farmer under § 101(18) but fail the 80 percent income from farming requirement to be a farmer under § 101(20).

[4]

Conversion from Chapter 13 to Chapter 12 at the request of a creditor, though unlikely, might be considered when the debtor would have dischargeability problems in Chapter 12 but not in Chapter 13.5 Chapter 12 is otherwise less favorable to creditors than Chapter 13, and any debtor eligible for both is likely to file a Chapter 12 in the first instance. A family farmer with a fraud debt might start out in a Chapter 13 case to cut off nondischargeability litigation. The victim of the fraud would consider a motion to convert to Chapter 12.

[5]

Though many of the substantive provisions of Chapter 12 are identical to their numbered counterparts in Chapter 13, the powers of a Chapter 12 debtor are expanded to include modifying a claim secured only by the debtor’s principal residence.6 The Chapter 12 debtor can provide for payment of an allowed secured claim over a period exceeding the maximum five-year duration of the plan.7 Coupled with the power to modify all secured claims, extended repayment enables Chapter 12 debtors to cram down large, long-term, secured claims in a manner not possible in a Chapter 13 case. Conversion from Chapter 13 to Chapter 12 is thus quite attractive for an individual family farmer who needs to rewrite a mortgage on a homestead.

[6]

These special powers of Chapter 12 debtors, not found in Chapter 13, were not affected by the Bankruptcy Reform Act of 1994.8 Chapter 12 was amended by the 1994 Act in the same manner as Chapters 11 and 13 with respect to the amount necessary to cure default through a plan.9

[7]

In Chapter 13 cases filed after October 22, 1994, the 1994 amendments to § 348(f) are applicable at conversion to Chapter 12. As detailed above,10 the 1994 Act amended § 348(f) to clarify the content of the estate at conversion and to apply valuations of property and of allowed secured claims in the converted case, with allowed secured claims reduced by payments made during the Chapter 13 case.11 In Chapter 13 cases filed after October 22, 1994, upon good-faith conversion to Chapter 12, the estate in the converted case consists of “property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”12 If conversion to Chapter 12 is in bad faith, the estate in the converted case “shall consist of the property of the estate as of the date of conversion.”13

[8]

Changes in the extent or value of property during the Chapter 13 case could affect the content of the Chapter 12 estate at conversion. For example, if the debtor (lawfully) disposed of a crop during the Chapter 13 case before a good-faith conversion, the crop—even if included in property of the estate during the Chapter 13 case—would be excluded from the Chapter 12 estate by § 348(f)(1)(A). If soybean futures changed in price during the Chapter 13 case (going up or down), that change might be “trapped” in the Chapter 13 case at conversion to Chapter 12 by the combined effects of § 348(f)(1)(A) and (f)(1)(B). If a farm asset was valued during the Chapter 13 case, that valuation “shall apply” after conversion to Chapter 12 under § 348(f)(1)(B).14

[9]

One theoretical use of conversion from Chapter 13 to Chapter 12 is with regard to the debtor who does not meet the definition of family farmer under § 101(18) at the petition, but whose circumstances change before confirmation making the individual eligible for Chapter 12. For example, in a district that delays confirmation until after the claims bar date,15 an individual falling short of the percentage income requirements to be a family farmer at the petition might meet those criteria as the taxable year changes during administration of the Chapter 13 case. At good-faith conversion to Chapter 12, this debtor would be entitled to the more favorable definition of property of the estate under § 348(f)(1)(A).16

[10]

A Chapter 13 debtor might voluntarily convert to Chapter 12 when the debtor is a family farmer determined to be ineligible for Chapter 13 because of too much debt. Conversion to Chapter 12 gives the debtor the benefit of the greater debt limitations in § 101(18). The Bankruptcy Reform Act of 1994 narrowed the difference in debt limitations between Chapter 12 and Chapter 13 by raising the limits for Chapter 13;17 however, because the debt limits for a family farmer are stated in terms of “aggregate debts” rather than divided between secured and unsecured debts as in a Chapter 13 case, most family farmers will still find Chapter 12 the more accessible chapter.

[11]

At the enactment of Chapter 12 in 1986, there were many individuals in pending Chapter 13 cases who met the definition of family farmer and desired to convert to new Chapter 12 to take advantage of the greater leverage of secured claims. Though there was some initial controversy, a strong majority of courts concluded that a Chapter 13 case filed prior to the effective date of Chapter 12 (November 26, 1986) could not be converted to Chapter 12.18 To get into Chapter 12, a debtor in a Chapter 13 case pending on November 26, 1986, had to dismiss or complete the prior case, then file a new Chapter 12. One court held that a debtor could not dismiss a Chapter 13 case that was filed prior to the effective date of Chapter 12 and immediately refile a Chapter 12 case if the sole purpose of refiling was personal advantage for the debtor.19


 

1  11 U.S.C. § 1307(d).

 

2  Fed. R. Bankr. P. 1017(f)(1).

 

3  11 U.S.C. § 1307(d) also controls conversion from Chapter 13 to Chapter 11, and a few courts have discussed the exercise of discretion by bankruptcy courts upon a request for conversion from Chapter 13 to Chapter 11. See § 321.1 [ Standing, Procedure and Grounds for Conversion to Chapter 11 ] § 146.1  Standing, Procedure and Grounds for Conversion to Chapter 11.

 

4  11 U.S.C. § 1307(e) provides, “The court may not convert a case under this chapter to a case under chapter . . . 12 . . . if the debtor is a farmer, unless the debtor requests such conversion” (emphasis added). See also §§ 7.1 [ Debtor Must Be an Individual ] § 10.1  Debtor Must Be an Individual; Spouses Allowed, 7.2 [ Sole Proprietorships Are Eligible ] § 10.2  Sole Proprietorships Are Eligible, 9.3 [ Farming, Crop and Land Set-Aside or Payment in Kind ] § 12.3  Farming, Crop and Land Set-Aside or Payment in Kind, 311.1 [ Conversion by Debtor ] § 141.1  Conversion by Debtor and 321.1 [ Standing, Procedure and Grounds for Conversion to Chapter 11 ] § 146.1  Standing, Procedure and Grounds for Conversion to Chapter 11.

 

5  The discharge at completion of payments under a Chapter 13 plan is broader than the discharge available under any circumstances in a Chapter 12 case. Compare 11 U.S.C. § 1328(a), with 11 U.S.C. § 1228(a). See § 147.2  Incentives to Convert to Chapter 12 after BAPCPA and § 157.1  Broadest Discharge Available.

 

6  Compare 11 U.S.C. § 1222(b)(2), with § 1322(b)(2).

 

7  11 U.S.C. § 1222(b)(9).

 

8  In contrast, Chapter 11 was amended in 1994 to include the restriction on modification of claims secured only by real property that is the debtor’s principal residence previously found only in § 1322(b)(2) of Chapter 13. See 11 U.S.C. § 1123(b)(5), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 206, 108 Stat. 4106 (1994), discussed in § 146.2  Strategic Considerations: Costs and Benefits of Conversion to Chapter 11§ 146.3  Incentives to Convert to Chapter 11 after BAPCPA and § 147.2  Incentives to Convert to Chapter 12 after BAPCPA.

 

9  See 11 U.S.C. § 1222(d), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 305, 108 Stat. 4106 (1994). The identical amendment to § 1322(e) is discussed in § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994.

 

10  See § 143.2  In Cases Filed after October 22, 1994, § 144.1  Exemptions at Conversion, § 145.2  In Cases Filed after October 22, 1994§ 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA, § 146.2  Strategic Considerations: Costs and Benefits of Conversion to Chapter 11 and § 146.3  Incentives to Convert to Chapter 11 after BAPCPA.

 

11  See 11 U.S.C. § 348(f), discussed in § 143.2  In Cases Filed after October 22, 1994§ 143.4  Priorities after Conversion: Two Trustees and a DSO, § 143.5  Bad-Faith Conversion, § 145.2  In Cases Filed after October 22, 1994 and § 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.

 

12  11 U.S.C. § 348(f)(1)(A), discussed in § 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2  In Cases Filed after October 22, 1994.

 

13  11 U.S.C. § 348(f)(2), discussed in § 143.2  In Cases Filed after October 22, 1994 and § 143.5  Bad-Faith Conversion.

 

14  See § 145.2  In Cases Filed after October 22, 1994 and § 145.3  Lienholders’ Rights at Conversion under § 348(f) after BAPCPA.

 

15  See § 115.1  Timing of Hearing on Confirmation before BAPCPA and § 115.2  Timing of Hearing on Confirmation after BAPCPA.

 

16  See above in this section, and see § 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2  In Cases Filed after October 22, 1994.

 

17  See § 11.1 [ Dollar Amounts ] § 14.1  Dollar Amounts.

 

18  In re Sadler, 935 F.2d 918 (7th Cir. 1991) (Chapter 13 case filed prior to effective date of Chapter 12 cannot be converted to Chapter 12.); In re Erickson Partnership, 856 F.2d 1068 (8th Cir. 1988) (Chapter 11 case); In re Glazier, 69 B.R. 666 (Bankr. W.D. Okla. 1987); In re Groth, 69 B.R. 90 (Bankr. D. Minn. 1987); In re Albertson, 68 B.R. 1017 (Bankr. W.D. Mo. 1987) (“[E]very aspect of [Chapter 12] cries out that conversion was intended, except for the words it was couched in.”). Contra In re Nelson, 73 B.R. 363 (Bankr. D. Kan. 1987).

 

19  In re Sadler, 935 F.2d 918 (7th Cir. 1991) (Chapter 13 debtor cannot dismiss and immediately refile under Chapter 12 if sole purpose of refiling is to gain the benefit of preferences recoverable in the prior Chapter 13 case. Debtors used the dismissal-refiling maneuver not to protect the rights of their other creditors but to divert more money to themselves. Nothing in the 1978 Code allows them to succeed.).