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Congress may make another attempt to reform the Chapter 12 bankruptcy law to allow more financially distressed family farmers to restructure debts and remain in operation.
Chapter 12, a bankruptcy code reserved for family farmers, was created during the 1980s farm crisis and modeled after Depression-era law. Congress has made several changes to the bankruptcy code over the years but experts suggest the average size of family farms has grown and the debt caps on Chapter 12 have not kept up with the times.
In December, Sens. Charles Grassley, R-Iowa, and Amy Klobuchar, D-Minn., introduced a measure to help financially struggling family farmers by proposing to increase the bankruptcy debt limits allowed in Chapter 12 filings to $10 million from roughly $4.1 million. The measure didn't pass, but a spokesperson for Klobuchar, a 2020 presidential candidate, told CNBC on Tuesday she plans to reintroduce the bill.
Similarly, Grassley was quoted last week as promising to "push ahead with reforms to Chapter 12 bankruptcy protection for family farmers that I have been developing as former chairman of the Senate Judiciary Committee."
"As farm income has declined over multiple years since 2013, the number of reported farm bankruptcies has begun to increase," the Congressional Research Service said in a report this month. "A policy concern has arisen over whether the $4.153 million Chapter 12 debt limit should be raised to allow larger farms to qualify for this bankruptcy option in light of the recent family farm financial stress, the rise in the number of bankruptcies, and the growth in the average size of farms."
According to the research service, farm bankruptcy filings have increased across 19 states, particularly in the upper Midwest where there's been a 19 percent rise in annual Chapter 12 filings since 2017.
The dairy sector, especially in Wisconsin, has been hit hard due to low milk prices. The number of family farms filing for Chapter 12 bankruptcy protection in Wisconsin alone has more than doubled in the past five years.
More than 600 Wisconsin dairy farms went out of business in 2018 as low milk prices and weak demand caused economic stress. The pain also is being felt elsewhere in the Midwest as agricultural producers struggle with low commodity prices and the trade war with China.
Nationally, there were 498 Chapter 12 filings by family farms last year, or 25 percent above 2014 levels.
"There's an awful lot of stress out here right now," said Joseph Peiffer, a Cedar Rapids, Iowa, bankruptcy attorney who specializes in farm bankruptcies. "Many farmers' debt limit is too large to allow them to file a Chapter 12."
He said "family farmer and mom-and-pop" operations often are above the current debt limit of roughly $4.1 million to qualify for a Chapter 12 bankruptcy. The limit has been indexed to inflation since 2005 but he suggests it hasn't kept up.
Peiffer estimates that about half of the family farmers that come to him have debt exceeding the current limits. He said some farmers who don't qualify for Chapter 12 end up forced into liquidation.
"On a farm now, with the high price of machinery and land, it doesn't take long to get up to that $4 million," said Gary Wertish, president of the Minnesota Farmers Union. "It's not just for the mega-farms."
However, some bankers have raised concerns about lifting debt limits on Chapter 12 and even suggested it might bring more write-offs of troubled agricultural loans.
"We're concerned the proposal may impose unexpected and unpredictable costs upon lenders, leading to higher borrowing costs for farmers – especially for those that need credit the most," said Sarah Grano, a spokesperson for the American Bankers Association.
One of the benefits of Chapter 12 is that it allows farmers to get a fresh start when reorganizing and some tax benefits, too. Taxes can be forgiven for the sale or transfer of assets in the restructuring.
"The Chapter 12 bankruptcy is a good provision for farmers," Wertish said. "It's put in place to allow a farmer under financial distress to be able to work out of it. It lets farmers work with banks on a payment plan to allow them to keep farming and maintain their operation."
Farmers who don't qualify for Chapter 12, though, sometimes end up in Chapter 11 — a bankruptcy designed for larger corporations. Other options for farmers include a Chapter 7 liquidation or Chapter 13, usually for wage earners with lower debts.
"Most people have a home and mortgage and car plus maybe college loans," said Wertish. "It's hard for them to look at that $4 million and comprehend that amount. But a lot of medium-size farms can hit that level, so we do support raising the limits due to the financial distress in agriculture."