Nearly six percent of the nation’s Chapter 12 bankruptcies in 2017 were filed in the Western District of Wisconsin, the most in the nation. The Eastern District of Wisconsin was sixth in the nation, with 17 Chapter 12 cases filed in 2017.
The top seven of the 94 federal judicial districts were ranked as follows:1
Number of Chapter 12 Cases
Western District of WISCONSIN
District of KANSAS
Middle District of GEORGIA
District of NEBRASKA
District of MINNESOTA
Eastern District of WISCONSIN
Eastern District of CALIFORNIA
In 2017, filings in the Western District of Wisconsin increased by 33 percent. This was the second consecutive year of rises of more than 30 percent.
The percentages may not be particularly significant, given the small number of cases filed. But the trend certainly is, and that trend is continuing this year. From January to June 2018, there were 26 Chapter 12 filings in Wisconsin.2 The next highest state had only 16.
While bankruptcy filings have dropped precipitously over the last several years, Chapter 12 filings have increased.3
There are, of course, numerous reasons and factors contributing to the rise in Chapter 12 farm bankruptcy filings. The falling of commodity prices is among them. The rising value of the dollar is, as well.
The U.S. Department of Agriculture (USDA) predicted a decline in 2018 net farm income to the lowest level since 2006.4 It predicts that medium farm income will be a negative $1,316.
Dairy farmers this year face a fourth straight year of milk prices being less than the cost of production. If it costs $1.90 to produce a gallon of milk, and farmers receive as little as $1.35 per gallon, it is easy to see why income is plummeting for dairy farmers.
While prices have declined, debt has increased. According to the American Farm Bureau Federation, the U.S. projects that both real estate debt and non-real estate debt will reach record highs this year.5
Farm Numbers Dropping
More and more dairy farmers have decided they cannot continue. USDA reported earlier this year that the total number of dairy farms in our nation has dropped to under 40,000. That is a 3 percent decline in the past year and a more than one-third drop in the past decade.
Wisconsin numbers are even worse. Wisconsin Public Radio reported that 5 percent of Wisconsin’s licensed dairy producers left the business since the start of the year.6 This is the biggest decline in four years.
Other farmers are fighting to save their farms, their livelihoods, and their way of life. Many of these farmers are looking to Chapter 12 for help.
Chapter 12 was enacted as the Family Farmer Bankruptcy Act of 1986 as a temporary measure. Congress extended its expiration date 11 times, and in 2005 finally made Chapter 12 a permanent option for farmers.
Chapter 12 Bankruptcy for Family Farms
To qualify for Chapter 12, a family farmer must meet both income and debt qualifications:
- The income test requires that more than 50 percent of the gross income be from the farming operation. The income test is determined by tax returns. The test may be satisfied by having at least 50 percent of the gross income be from the farming operation in the tax year immediately preceding the year of the bankruptcy filing. The test can also be satisfied if the second and third prior tax years meet the 50 percent of gross income test.
- Aggregate debts may not exceed $4,553,150. At least 50 percent of that debt (excluding a debt for the homestead) must arise out of a farming operation.
Many farmers are failing to qualify under this debt limit. In large measure this is due to the consolidation of family farms. Farming is a capital intense business, and farmers rely heavily on loans to operate.
Congress may have had good intentions in tying the Chapter 12 debt limits to inflation, but it failed to consider the rapid rise of debt that occurs through consolidation and the growth of farms.
Federal farm policy over the last 30 years, or more, has been to encourage farmers to “get big or get out.” As a result, the number of dairy farms continues to shrink, although the milk supply continues to grow. This is because the remaining farms get ever larger.
One source reports that, in 1987, half of America’s dairy farms had no more than 80 cows. By 2012, half had at least 900 cows.
As the farms grow larger, an increasing number of farmers fail to qualify for Chapter 12 relief because their aggregate debt exceeds the debt limit allowed. Although the debt limit has been tied to inflation since 2005, the debt of farmers has increased far faster than the rate of inflation.
When Chapter 12 is not available, farmers lose perhaps their most powerful tool for dealing with creditors. While a farmer may also file bankruptcy under Chapter 11, the cost is often prohibitive. Chapter 12 has tax and interest rate advantages that might not be available in Chapter 11. Moreover, Chapter 11 gives creditors far more control in approving any proposed repayment plan.
Bankruptcy Update 2018
This year’s session, Annual Bankruptcy Update 2018 - Western District, features the presentation “All Things Ag: Farm-Related Bankruptcies.” Nicholas Hahn, Brittany Augden, and Craig Stevenson discuss ag liens, farmer’s use of collateral, tax considerations, and obtaining financing.
While the program took place Nov. 15, 2018, you can now attend anytime via On Demand replays from State Bar of Wisconsin PINNACLE®. Visit WisBar.org’s Marketplace for more information.
Do you have ideas to help family farmers cope? Please let me know.
1 U.S. Courts, Caseload Statistics Data Tables, U.S. Bankruptcy Courts - Business and Nonbusiness Cases Filed, by Chapter of the Bankruptcy Code (2017).
2 U.S. Courts, Caseload Statistics Data Tables, U.S. Bankruptcy Courts - Business and Nonbusiness Cases Filed, by Chapter of the Bankruptcy Code (2018) (based on three-month reporting periods).
3 U.S. Courts, Caseload Statistics Data Tables, U.S. Bankruptcy Courts - Business and Nonbusiness Cases Filed, by Chapter of the Bankruptcy Code (2014 to 2017).
4 Net Farm Income Projected to Drop to 12-year Low, American Farm Bureau Federation (Feb. 12, 2018).
5 Wisconsin State Farmer, May 15, 2018
6 Wisconsin on Pace to Hit Highest Loss of Dairy Farms in 4 Years, Wisconsin Public Radio (Sept. 13, 2018) (“The latest data from the state Department of Agriculture, Trade and Consumer Protection shows there were 8,372 licensed dairy producers at the beginning of September. That’s 429 fewer than were licensed at the start of the year.”).