Farmers Have More Freedom to File Bankruptcy Under New Chapter 12 Law
Everyone is on the edge of their seats, waiting for President Trump to sign several pending bills impacting bankruptcies in the United States. One of them is the Family Farmer Relief Act of 2019, passed on July 29th by the House and on August 1st by the Senate. While less than one page long, it has a very sizable change. The debt limit for eligibility to file a chapter 12 has been increased to $10 million.
Originally passed in 1986, the initial debt limit for “family farmers” to file for chapter 12 relief was $1.5 million. The 1980s were an era of farming industry crisis. Chapter 12 was created to be a specialized cross between a chapter 11 and a chapter 13, weaving in concepts of “reorganization plans” and other less onerous (and hopefully less costly) process and requirements than chapter 11.
The definition of “family farmer” has not changed, so only individuals and businesses who meet the definition can quality for chapter 12 relief. The definition is quite long, and is found in 11 U.S.C. §101(18), but in short, includes those engaged in a farming operation with at least 50% of the total debt and over 50% of the gross income being related to farming, with a look back period for income. Chapter 12 also includes “family fishermen” in a similar definition. The concept all along has been to limit the relief to “real” farmers, and exclude hobby farms as well as huge agricultural operations.
The new increased debt limit (assuming it is signed into law) makes chapter 12 a more viable option, since many mid-size farming operations, with large equipment debt and crop-related debts often have well more than the current debt limit, which is $41,453,150. That “odd” amount exists because the debt limits historically increase by a 3% inflation amount every 3 years under the Bankruptcy Code.
Congress has recognized the harsh realities of efforts to run a “family farming” business, which are many. Increasing the debt limit to $10 million will help a broad segment of family farming operations, giving them a “breathing spell” to weather the current storms and restructure and rehabilitate their financial and operational business affairs under an organized structured process within the Bankruptcy Court system.
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