11 U.S.C. Section 1226 - Payments Under a Chapter 12 Plan

What Is Section 1226?

Section 1226 governs the mechanics of payments under a confirmed Chapter 12 plan. Chapter 12 is the Bankruptcy Code's specialized reorganization chapter for "family farmers" and "family fishermen" (as defined in Section 101(18) and (19A)). Although Chapter 12 borrows many features from Chapter 13, the payment-mechanics provisions differ in important ways - most notably, the Chapter 12 plan typically authorizes direct payments by the debtor to many secured creditors rather than the centralized Chapter 13 model in which all payments flow through the standing trustee.

Section 1226 addresses three principal topics: (1) how pre-confirmation payments are held and distributed; (2) the post-confirmation distribution scheme; and (3) the standing-trustee compensation framework.

Pre-Confirmation Payments: Section 1226(a)

Section 1226(a) provides that payments and funds received by the trustee before confirmation are to be retained by the trustee until confirmation or denial of confirmation. If the plan is confirmed, the trustee distributes such payments in accordance with the plan as soon as practicable. If the plan is not confirmed, the trustee returns the funds to the debtor, after deducting unpaid claims allowed under Section 503(b) (administrative expenses) and other amounts specified in the section.

This mirrors the analogous Section 1326(a) Chapter 13 provision. The practical effect: the debtor must begin making plan payments to the trustee in the gap between filing and confirmation, and those funds are held in escrow against the alternative outcomes of confirmation or denial.

Post-Confirmation Distributions: Section 1226(b) and (c)

Section 1226(b) sets the priority order for distributions before plan payments commence: "Before or at the time of each payment to creditors under the plan, there shall be paid - (1) any unpaid claim of the kind specified in section 507(a)(2) of this title; and (2) if a standing trustee appointed under section 1202(c) of this title is serving in the case, the percentage fee fixed for such standing trustee under section 1202(d) of this title."

Section 1226(c) addresses the channel through which payments flow: "Except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan." The "except as otherwise provided" language is critical and is the source of the direct-payment model dominant in Chapter 12 practice. Confirmed Chapter 12 plans routinely provide that the debtor will make direct payments to specific secured creditors (mortgage holders, equipment lenders, ag-credit lenders) and to ordinary trade creditors, with the trustee handling only the priority and unsecured pool.

The Standing-Trustee Fee: Sections 1202(d) and 1226(b)(2)

Where a Chapter 12 case is administered by a standing trustee appointed under Section 1202(c), the standing trustee's compensation is set by the Attorney General under Section 1202(d) as a "percentage fee, not to exceed - (A) in the case of a debtor who is not a family farmer or family fisherman, ten percent; or (B) in the case of a debtor who is a family farmer or family fisherman, the sum of - (i) not to exceed ten percent of the payments made under the plan of such debtor, with respect to payments in an aggregate amount not to exceed $450,000; and (ii) three percent of payments made under the plan of such debtor, with respect to payments such that the aggregate amount of payments exceeds $450,000."

The graduated fee structure reflects Congress's intent that the Chapter 12 trustee not absorb a disproportionate share of recoveries in larger agricultural cases. The fee is deducted from each payment as the trustee distributes it, with both the priority administrative expense (1226(b)(1)) and the trustee fee (1226(b)(2)) taking priority over plan distributions to creditors.

The Direct-Payment Practice in Chapter 12

The "except as otherwise provided" language of 1226(c) is the foundation of the direct-payment practice. Chapter 12 debtors typically have a small number of high-dollar secured creditors (the farm mortgage holder, the equipment-loan lender, the operating-line lender), and the standard practice is to provide in the plan for direct payment by the debtor to those creditors. This minimizes the trustee's percentage-fee bite on what are usually the largest payment streams in the case. Some districts impose local-rule limits on the scope of permissible direct payments, and the standing trustee may object on grounds that direct payment removes the case from meaningful trustee supervision.

Practical Implications for Debtors

Chapter 12 was enacted in 1986 as a temporary response to the 1980s farm credit crisis and was made permanent in 2005. Its features - including the seasonal payment structure permitted by Section 1222(b)(9), the more favorable cramdown rules of Section 1225(a)(5), the broader debt-limit eligibility, the ability to discharge taxes incurred from disposition of farm assets under Section 1232, and the direct-payment model under Section 1226(c) - make it the chapter of choice for eligible farm operations seeking to restructure rather than liquidate.

Section 1226 mechanics interact with each of these features. For example, the seasonal payment structure of a Chapter 12 plan (e.g., one annual payment after the harvest) means the trustee's percentage-fee calculation may be lumpy across the year, and the debtor's cash-flow planning must account for the order-of-operations priority that Section 1226(b) imposes on the trustee fee and any unpaid 507(a)(2) administrative claims.

Common Procedural Postures

• Confirmation objections by the standing trustee challenging direct-payment provisions that would reduce the trustee's percentage-fee base;
• Pre-confirmation refund disputes where the debtor seeks return of accumulated payments after denial of confirmation;
• Plan-modification motions under Section 1229 affecting the payment-distribution channels and trustee fee;
• Hardship-discharge motions under Section 1228(b) that interact with Section 1226 final-distribution calculations.

Related Bankruptcy Code Sections

• Section 1202 - Trustee in Chapter 12 (and standing trustee fee under 1202(d))
• Section 1222 - Contents of a Chapter 12 plan
• Section 1225 - Confirmation of a Chapter 12 plan
• Section 1228 - Discharge in Chapter 12
• Section 1229 - Modification of plan after confirmation
• Section 1326 - Chapter 13 parallel (payments and distributions)