The current farm economy may very well force some difficult decisions upon many family farms. Fortunately, after the implosion of the farm economy in the 1980’s, Chapter 12 was added to the Federal Bankruptcy Code.  Chapter 12 exists to provide a special type of restructuring opportunity for family farms.

While not so much as in the past, it is probably fair to say that there is a sort of stigma that exists through the farming industry about electing to engage in bankruptcy.  Likely, this stems from people believing they have failed if they have to utilize bankruptcy.  Honestly, I wish the official name for a “Chapter 12 Bankruptcy” was instead something along the lines of a “Chapter 12 Legal Farm Restructure”.    In fact, the title for Chapter 12 in the Bankruptcy Code is “Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income.” Business restructure all the time.  Many utilize the protections afforded under the Bankruptcy Code.  So did our current president.  Why should farms be any different?

Unlike other businesses, financial failure for us as famers can be only one failed crop, one lawsuit, one farming accident, etc., away.  There are so many forces beyond our control that affect our financially livelihood, sometimes it may seem we are in a boat with no oars and dependent on where the current takes us.   Often times, just contemplating bankruptcy, and making it known, can be an effective tool for farmers.  Having a pre-bankruptcy analysis can often provide a lay of the land should a farmer decide to utilize Chapter 12.  This can provide a very powerful tool for farmers to force creditors to the bargaining table so as to work with the farmer. 

An individual farmer or a married couple that engage in a farming operation must meet the following specific eligibility requirements as set forth in § 101(18)(A) of the Bankruptcy Code:

o    The farmer’s total amount of debt cannot be greater than $ $4,153,150 as of the day the case is filed. At least fifty percent (50%) of the aggregate, non-contingent, liquidated debt must come from the farming operation.

o    More than fifty percent (50%) of the gross income for the taxable year before the bankruptcy is filed must come from the farming operation. However, farmers can also meet the gross income test if more than fifty percent (50%) of their gross income in each of the second and third taxable years before the bankruptcy filing came from the farming operation.

A corporation or partnership that engages in a farming operation can also be eligible for Chapter 12 relief if it meets the following specific eligibility requirements set forth in § 101(18)(B):

o    More than 50 percent of the outstanding stock or equity in the partnership or corporation must be held by one family, or by one family and the relatives of the members of that family.

o    The family or their relatives must conduct the farming operation.

o    More than 80 percent of the value of the assets of the corporation or partnership must be related to the farming operation.

o    The debts of the corporation or partnership must not be greater than $4,153,150, with this amount increased each 3 years with the Consumer Price Index. This reflects a change, as noted with regard to the individual limitation.

o    Not less than fifty percent (50%) of the corporation or partnership aggregate, non-contingent, liquidated debt must arise out of the farming operation that is owned or operated by the corporation or partnership.

o     If a corporation issues stock, its stock must not be not publicly traded.

Understand that the definition of “family farmer” will depend on defining some aspect of farming: farm income, farm debt, engaged in farming. In addition, to qualify a farmer must have regular annual income that allows the debtor to make payments under the plan.  Non-farm income can be used to satisfy this requirement. There is a significant amount of case law on family farm eligibility, although there is significant variation between jurisdictions.

                Once a Chapter 12 is filed, the famer has 90 days to propose a plan to restructure the debts. The plan needs to make payments to creditors over three to five years. The plan can provide for payment of 100% of creditors’ claims, but it does not have to under certain circumstances. In some instances, the plan must be 5 years long and, in some instances, payment must be at least equal to the farmer’s disposable income as that term is defined by the Bankruptcy Code.

                Chapter 12 is typically less costly and less complicated than a Chapter 11 bankruptcy. While its goal is to help the family farmer reorganize debts, Chapter 12 can be used to sell some or all of the farm assets.   Keep in mind that a chapter 12 farm restructure is, well, just that:  it’s a farm restructure.  The fact that it falls under the bankruptcy umbrella should bring no shame, stigma, or otherwise upon a farmer.  We address will the chapter 12 process in more detail in the future.   

John J. Schwarz, II, is a lifelong farmer and has been an agricultural law attorney for 12 years. He can be reached at 260-351-4440, john@schwarzlawoffice.com, or visit him at www.farmlegacy.com.