Chapter 12 of the Bankruptcy Code was developed in the 1980s specifically for family farmers and family fishermen. In the 1970s, a rise in farm exports, commodity prices, and land values resulted in family farmers opening up larger and more expensive farming operations to keep up with demand.
When this demand began dropping in the 1980s, the expense of running the larger operations and the interest rates did not drop with them. This left farmers scrambling to reorganize their debt and Chapters 11 and 13 were not well suited to this effort.
In creating Chapter 12 specifically for family farmers, Congress was specifically acknowledging the special place farmers hold in our society and economy.
How Does a Chapter 12 Bankruptcy Work?
Chapter 12 contains two qualifying requirements. The debt limit for the farmer must be below approximately 4 million and at least 50% of the farmer’s income must come from the farming operation in order to qualify for Chapter 12 relief.
There is a strong argument to be made that Congress now needs to increase the debt limits for Chapter 12 qualification. Every year expenses can be expected to increase and farmers pressured to borrow more money to keep the farm above water.
For example, in Alabama where there is a low cost of living, a poultry farm start-up can easily cost up to 1.5 million to begin production. Farmers in other states where the cost of living is not as low could easily find themselves over the debt limit threshold and therefore without needed bankruptcy relief.
How Decreased Exports Affect Farming Life
In addition, farmers are always subject to periods of decreased exports while farming expenses continue to increase.
If a farmer is faced with decreasing exports, he or she may turn to additional means of earning income. This additional income could result in the farmer earning less than 50% from the farm operation and thereby be eliminated from relief under Chapter 12.
Now we have the looming threat of how the Trump tariffs are going to impact farm exports.
Right now, China’s retaliatory tariffs have impacted 30 percent of agricultural products. These tariffs are recent and it will take some time before we see the real impact. Chapter 12 bankruptcy filings were down overall for the fiscal year 2018 (ending September 2018).
However, for the more agriculturally concentrated areas, the filings were actually up. While the national number of Chapter 12 bankruptcy filings is seen as a barometer of the health of the farming industry, the U.S. Department of Agriculture still predicts an increase in debt to income ratio for farmers to 13.4%, one of the highest increases in years.
What Does Chapter 12 Do for Farmers That Other Chapters of the Bankruptcy Code Do Not?
First, farm debt on average can be several hundred thousand dollars. Dealing with this amount in a Chapter 13 where the length of time to service the debt is, at most, 5 years does not provide effective help.
Second, reorganization of debt under Chapter 11 can be prohibitively expensive for a family farmer. Just the difference in filing fees for the Chapter 11, $1,717.00, versus the filing fee for Chapter 12, $275.00, indicates how much more expensive it can be. Creditors in Chapter 11 can effectively veto a reorganization plan thereby preventing approval by the bankruptcy court.
In Chapter 12, the bankruptcy judge can approve the farmer’s repayment plan over the objection of a creditor as long as the requirements of §1222 and §1225 have been met. This includes providing for the payment of secured farm debt over a period exceeding the 5 year limit of a Chapter 13.
The ability to modify the amount of time over which the secured farm debt must be paid and the interest rate that will apply can provide great relief in the monthly expenditures of a farm.
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Carla M. Handy is the Managing Partner of the Bond & Botes Law Offices in Gadsden and Anniston, Alabama. She holds a Bachelor of Arts from Auburn University, and a Juris Doctorate from the University of Alabama School of Law. She has been helping families navigate consumer bankruptcy cases since 1994.Read her full bio here.