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Disposable Income in Chapter 12

If a trustee or a holder of an unsecured claim objects to the plan, the court cannot approve the plan unless the plan provides that all of the debtor’s projected disposable income to be received during the plan will be applied to make payments under the plan. It is significant to understand that an objection by the mentioned parties must be made for the court to consider this requirement.

The debtor’s plan usually lasts three to five years. It must provide for payment in full to all priority creditors. The plan need not provide that unsecured creditors be paid in full, as long as the debtor pays under the plan all projected “disposable income” over the three to five years that the plan is in effect and as long as the plan provides that unsecured creditors are to receive at least as much as they would receive if the debtor’s nonexempt assets were liquidated under chapter 7. Chapter 12 debtors must turn over disposable income during the course of their farm operations under a plan. The debtors should also provide an accounting for the final disposable income determination at the end of the plan, prior to discharge, to ensure that they have not accumulated an unreasonably large reserve of funds at the time of discharge.

“Disposable Income” means income which is received by the debtor and which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor; or for the payment of expenditures necessary for the continuation, preservation, and operation of the debtor’s business. Courts have held that the debtor bears the burden of proving what expenses are reasonably necessary for their farming operations and living expenses.

Within 45 days after the filing of the plan, the presiding bankruptcy judge must determine at a plan confirmation hearing whether the plan is feasible and meets the standards for confirmation under the Bankruptcy Code. Creditors may appear at the hearing and object to confirmation. While a variety of objections may be made, the typical arguments are that payments offered under the plan are less than creditors would receive if the debtor’s assets were liquidated or that the plan does not commit all of the debtor’s disposable income for the three-to-five-year period of the plan.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.