Chapter 12 Bankruptcy and Farmland Assets

Chapter 12 bankruptcy was created in 1986 as a temporary solution for farmers facing economic turmoil. Specifically, it helped farmers recover from low commodity prices, low farm income, record farm debt and rigid agricultural credit markets. After extending it several times, it became a permanent feature of the bankruptcy code under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Because Chapter 11 was deemed “too complicated, expensive, and time-consuming for farmers” and Chapter 13 didn’t “address the larger debt loads faced by family farmers,” Congress created this new chapter so farmers could “reorganize their debts and keep their land,” according to The National Agricultural Law Center.

Family farms are unique enterprises that often have cyclical income and few liquid funds. They experience more unpredictability than most industries because of the agricultural economy’s fluctuations in commodity prices, interest rates, foreign production and government policies not to mention Mother Nature’s influence on crop yields.

In 2019, Chapter 12 bankruptcy filings increased to the third-highest number in history with a total of 595 farms; however, since then, bankruptcy filings among farmers have steadily decreased. In fact, 2023 marked the first time since Chapter 12 became permanent that there was the lowest number of farms filing; only 139 farms filed last year.

What happens when you file Chapter 12 bankruptcy

Filing for Chapter 12 bankruptcy will automatically stop most of the collections against the farmer and allow them to continue running the farm in the meantime. It creates an automatic stay, which protects the farmer – and the farm – from having wages garnished, lawsuits filed to collect debts and additional harassment from collections agencies. This type of bankruptcy provides more exceptions than others; however, those who file should be aware that it stays on credit reports for up to seven years.

Within 20 to 30 days of filing bankruptcy, a bankruptcy trustee holds a meeting with creditors. The farmer is required to answer any questions asked by creditors under oath and, together, they come up with a repayment plan that works for all parties. One note is that, sometimes, a farmer will have up to 90 days to file a reorganization plan. No payments are required until the plan is finalized.

Benefits of filing Chapter 12 bankruptcy

Unlike other types of filing, farmers who file Chapter 12 bankruptcy often keep more assets to run their business than typical individuals or corporations that file – and their assets are not at risk of liquidation. Credit counseling also isn’t required in Chapter 12 filings unlike in Chapter 7 cases.

Holding a farmland auction to help clear debt can be an option. This is generally discussed during the initial meeting between creditors and the bankruptcy trustee and can become part of the reorganization plan that’s agreed upon during the proceedings. This is a way for farmers to quickly repay debts if they can sell off extra equipment, land, livestock and, generally, anything that they elect to sell during a farmland auction. These are considered non-exempt properties.

Farmland auctions can include the actual homestead; however, some farmers may choose not to include some items. These are considered exempt property, which include the homestead and surrounding land, tools needed to complete the farming work, retirement accounts and unmatured life insurance policies. In fact, exempt items are never up for grabs unless the farmer decides they are as the whole purpose of filing bankruptcy is to provide a fresh start to that person or company instead of making things more difficult. This does differ from those who file Chapter 7, which are also known as liquidation bankruptcies. Chapter 7 bankruptcies typically require an auction of all non-exempt assets.

Chapter 12 also allows for a flexible payment schedule to accommodate seasonal earnings and allow for assets to remain in the farm’s account in order to run the farming operations. Some may choose to “cram down” debt once they file. “Cramming down” debt after filing allows the debtor to lower the amount of secured debt that they owe. For example, if a farmer still owes $500,000 on a new Case IH combine, but it has depreciated in value and is now only worth $325,000, the amount the farmer must pay back will be “crammed down” to the $325,000 rather than the original $500,000 debt. Further, because a farm usually includes other buildings like the actual homestead and barns, this cram down principle can also be applied to their home as well as the land and outbuildings around it, meaning a reduced mortgage balance that reflects current market value. This is not allowed if an individual files Chapter 11 or 13 bankruptcy.

Once they’ve filed Chapter 12 and the reorganization plan is agreed upon, it is time to start payments. However, farmers can expect a longer repayment plan that ranges from three to five years. Extensions are also allowed under Chapter 12 bankruptcy if more time is needed unlike other types of bankruptcy.

Basic terms for to understand regarding bankruptcy

A bankruptcy is a non-technical term for the legal state of insolvency.

An insolvent is another term used to describe a firm or individual that is failing financially. Generally, it means that a firm’s/corporation’s/individual’s liabilities exceed its assets or that it is unable to satisfy its obligations as they come due.

A bankruptcy discharge is a court order, which states that a debtor does not have to pay most of their debts. These do not include non-dischargeable debts, such as taxes, child support, alimony, student loans, court fines and criminal restitutions.

A reaffirmation agreement is when the debtor agrees to pay a debt that otherwise might be discharged in his or her bankruptcy case.

Special thanks to Johnathon L. Cottingim of Wright & Moore Law Co., LPA for providing detailed information about Chapter 12 bankruptcy.