Agricultural Law and Rural Practice Blog: Chapter 12 Bankruptcy Relief Now Available to More Farmers:

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  • Agricultural Law and Rural Practice Blog
    August
    29
    2019

    Chapter 12 Bankruptcy Relief Now Available to More Farmers

    J David Krekeler

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    Recently signed into law, the Family Farmer Relief Act more than doubles the debt limit for family farmers seeking Chapter 12 bankruptcy relief. J. David Krekeler discusses the impact the Act may have, and why action is needed to assist family farmers.
    farm tractor on field

    On Aug. 23, 2019, President Donald J. Trump signed the Family Farmer Relief Act of 2019 (H.R. 2336) into law. The bipartisan bill is intended to reflect and update the economic realities facing distressed family farmers.

    Chapter 12 Bankruptcy and Too-low Debt Limit

    Chapter 12 bankruptcy was created for smaller, “family” farm businesses. It was enacted during the 1980s farm crisis because neither Chapter 13 nor Chapter 11 worked well to enable farmers to reorganize and keep farming.

    David Krekeler J. David Krekeler, UW 1979, has been solving financial problems for farmers since 1983 and is a founding principal and shareholder with Krekeler Strother, S.C., Madison.

    The original debt limit which a farmer could not exceed in order to qualify for Chapter 12 relief was $1.5 million. The law had a sunset provision and was to expire in seven years. That sunset date was extended and eventually eliminated. The debt limit has been consistently increased, and most recently is $4,153,150.

    Many farmers have been failing to qualify because of this debt limit. While the limit was increased to account for inflation, Congress failed to consider the impact of the consolidation of family farms. Farms have grown increasingly larger, and their aggregate debt has grown concurrently. The result is that many family farmers could no longer avail themselves of Chapter 12.

    Chapter 11 Bankruptcy Relief

    Farmers above the Chapter 12 debt limit may seek bankruptcy relief under Chapter 11, but the cost is often prohibitive.

    In addition, Chapter 11 also contains a number of provisions and has requirements that make reorganization very difficult. A few of those differences (from Chapter 12 relief) are:

    • Voting: Chapter 11 creditors get to vote on the proposed plan. Without an affirmative vote to take less, creditors may have to be paid in full.
    • Ownership: Chapter 11 debtors can only retain ownership of the business or assets if creditors either accept the plan or all creditors are paid in full. Chapter 12 permits the family farmer to remain the family farmer.
    • Cram down rights: Both Chapter 11 and Chapter 12 permit cram down, or modification of the rights of secured creditors. In Chapter 13 that modification may include loans secured only by the debtor’s principal residence. Chapter 11 does not afford this relief.
    • Creditor committees: Chapter 11 often involves having creditors appointed to a committee. While this makes a lot of sense in large corporate bankruptcies, in small cases it simply adds to the cost of administration. Chapter 12 does not provide for creditor committees.
    • Adequate protection: Secured creditors are entitled to be protected from the diminution of the value of their claims. This means that debtors who use collateral must compensate the secured creditor for any depreciation. Chapter 12 has a more relaxed standard for adequate protection.

    There are many other differences in this specialized area of bankruptcy law. Perhaps most importantly, the administrative cost in a Chapter 12 case, including attorney fees, is usually substantially less than the cost of a Chapter 11 case.

    The Impact of the Family Farmer Relief Act

    Farm income has gone down since 2013, reports the American Bankruptcy Institute. The Federal Reserve surveyed Midwest bankers and found that the percentage of farming borrowers struggling to repay their loans hit a 20-year high this year.

    The Family Farmer Relief Act more than doubles the debt limit for family farmers, up to $10 million. The legislation contains no other revisions to Chapter 12, but will likely have a major impact on the farm bankruptcy landscape. The hope of Sen. Chuck Grassley (R-Iowa) is that the increase in the debt limit will avoid “mass liquidations and further consolidation in the largest sectors of the industry.”

    I have doubts that these goals will be achieved, but there is no doubt that more farmers will now qualify for Chapter 12 relief. This will permit more farm operations to survive.

    Fewer Chapter 12 Cases

    Still, I do not expect to see the number of Chapter 12 cases filed to come anywhere close to the numbers we saw when Chapter 12 was created. Nearly 6,000 were filed in 1987. Last year less than 500 cases were filed.

    This decline in numbers is not due to debt limit increases. It is because we have far fewer family farms now than in the latter part of the 1980s. For this reason alone, it is almost impossible that we will ever see the volume of Chapter 12 cases that were filed in the late 1980s.

    But the Family Farmer Relief Act provides relief to a significant number of farmers. Had this law been passed three years ago, several of my clients might have succeeded in continuing their farming efforts. Instead, the lack of a Chapter 12 option resulted in a loss of yet more Wisconsin farms.

    Do you have ideas about the options available to farmers? If so, please let me know.​

    This article was originally published on the State Bar of Wisconsin’s Agriculture Law and Rural Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section web pages to learn more about the benefits of section membership.

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