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Chapter 12 Debt Ceiling Increased to $10 Million

On Behalf of | Feb 11, 2020 | Bankruptcy

According to the American Farm Bureau, farm bankruptcies increased by nearly 20 percent last year, with 595 family farms filing Chapter 12 bankruptcy petitions, 27 of which were located in Iowa. In fact, farm bankruptcies in Iowa have reached their highest in over a decade. In an effort to address these increases, Congress enacted the Family Farmer Relief Act late last year, which increased the debt ceiling for petitioners from $4.4 to $10 million, thereby enabling more farmers to file for Chapter 12 relief. To learn more about the recent changes to federal bankruptcy law and how they could affect your own legal situation, please contact one of our experienced bankruptcy lawyers today.

Bankruptcy  Reorganization Options Available to Farmers

The bankruptcy reorganization options for which U.S. farmers can qualify depends in large part on their specific circumstances. For instance, Chapter 12 bankruptcy protections are only available to family farms and fishermen who can claim regular annual income from their operation, including farms structured as partnerships or corporations. Farmers seeking to restructure by filing for Chapter 12 must also meet the debt limit requirement and be able to demonstrate that:

  • At least 50 percent of their total fixed debts (excluding home loans) are farming operation-related; and
  • More than 50 percent of their gross income for the preceding tax year or for the second and third prior tax years came from farming.

Farmers who meet these qualifications are permitted to propose a plan, under which they agree to fully pay off all priority claims and repay secured creditors at least as much as the value of their collateral. Eligible farmers must then commit any remaining disposable income to pay off unsecured loans.

It’s important to note that Chapter 12, unlike Chapter 7 bankruptcy proceedings, do not mark the end of a farming business, but instead provide farmers with the option to restructure their operation and move forward with a more economically feasible financial plan.

Expanding Chapter 12 Bankruptcy Protections for Farmers

Historically, the biggest downside to Chapter 12 bankruptcy was its relatively low debt ceiling, which forced many farmers to look elsewhere when restructuring. Concerns over this limitation, as well as the current economic challenges faced by distressed farmers, including high debt and uncertain markets, recently led lawmakers to pass new legislation in 2019. Known as the Family Farmer Relief Act, the new statute expands the amount of debt that a farmer can have and still qualify as a family farmer who is eligible for Chapter 12 bankruptcy to $10 million.

The increased debt ceiling was largely intended to reflect the fact that land values have increased significantly, as has the average size of U.S. farming operations, since the mid-1980’s when the law was passed. It is hoped that the increased cap will now allow more farmers to qualify for Chapter 12 bankruptcy, which comes with the following advantages:

  • Allowing farmers to make payments seasonally, which better reflects the ebbs and flows of farm income;
  • Giving farmers more time to begin making payments;
  • Relatively low filing costs;
  • Allowing farmers to sell any farm-related equipment as long as it is unencumbered by liens;
  • Giving creditors much less latitude when it comes to challenging sales; and
  • Allowing farmers to pay creditors based on the current value of collateral in their home rather than what they still owe on their mortgage.

Although these advantages made Chapter 12 proceedings the preferred method of bankruptcy for farmers, individuals who fell under this category in prior years were often forced to file for Chapter 11 bankruptcy because they owed more than the debt ceiling of $4.4 million, a problem largely eliminated by the increased debt ceiling.

The Potential Impact of the Chapter 12 Cap Increase

The impact of the new changes on farmers in Iowa and across the rest of the country remains to be seen, but most experts anticipate that it will help many small family farms avoid liquidation or foreclosure during economic slumps. Critics of the change, on the other hand, have expressed concern that the new debt limit increase could actually increase the cost of borrowing for ranchers and farms and also reduce the availability of credit.

Contact Our Office Today

If you have questions about how the new bankruptcy law could impact the fate of your own family farm, please call one of the experienced bankruptcy lawyers at Telpner Peterson Law Firm, LLP today. We can be reached at 712-309-3738 or via online message.