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Chapter 12 Bankruptcy: Financial Crises and the Family Farm

Financial Crises and the Family Farm

The virtual shutdown of the country for much of March and April has, and will, continue to have a devastating financial impact on the farming industry. Crops sit unharvested, milk is being dumped, and cattle remain in the fields because restaurants are ordering a fraction of the amounts they previously bought, and consumers are tightening their budgets because of their loss of income. The result is that many family farming operations are facing difficult financial situations and need to make decisions about how to proceed. One option that a lot of family farmers are not aware of is protection under Chapter 12 of bankruptcy code, which is designed specifically to protect family farms by allowing them to create a manageable plan to repay their debt in a manner that allows for the continuing operation of the farm.

Who qualifies as a “family farmer” for Chapter 12 purposes?

Chapter 12 recognizes two types of family farmers: (1) individuals and (2) corporations or partnerships.For individuals to qualify:

  • The individual, or husband and wife, must be engaged in a farming operation. Family Fishermen are under 11 U.S.C. § 19A;
  • The farming operation’s total debts must be less than $10,000,000.00;
  • 50% of the farming operation’s total liquidated debt amount, not including debt relating to the individual’s home, must be related to the farming operation; and
  • More that 50% of the gross income for the individual (or husband and wife) for the past 3 years must have come from the farming operation.

For corporations or partnerships to qualify:

  • More than half of the outstanding stock or equity in the corporation or partnership must be owned by one family or the family and its relatives;
  • The family and its relatives conduct the farming operations;
  • More than 80% of the value of the corporation’s or partnership’s assets are related to the farming operation;
  • The farming operation’s total debts must be less than $10,000,000;
  • 50% of the farming operation’s total liquidated debt amount, not including debt relating to one shareholder’s home, must be related to the farming operation; and
  • There can be no publicly traded stock in the corporation.

Does filing for Chapter 12 protection mean I will lose the farm?

The goal of Chapter 12 bankruptcy proceedings is to avoid that result.Chapter 12 offers several options for the family farmer. When the goal is to maintain the current scope and scale of the farming operation, there is a traditional reorganization plan. When the family farmer takes this path, a plan is proposed to pay his debts over a period of years in manner that allows the farming operations to continue, and exit bankruptcy with the opportunity to proceed with a clean slate.

What if the farming operations as is are not sustainable in their current scope?

In cases where the family farmer does not think that the operation is viable under its current business model, Chapter 12 allows the family farmer to downsize into a more manageable and profitable, or to diversify into different areas which may be more profitable.For example, a farm might discontinue growing certain unprofitable crops, and may sell unneeded equipment or unused acreage that could reduce the amount of debt to a manageable level that would allow operations to continue on a smaller scale.

What if I just want out?

Chapter 12 holds many benefits, even if you have decided that you no longer wish to continue with operations. For example, if you cannot sell your operation for a sufficient amount on your own, then you may remain liable for any deficiencies. Also, Chapter 12 can aid you in relation to tax consequences relating to the sale of your farm land, as it includes special rules relating to the capital gains taxation.It is crucial to be fully informed about all available options, anytime that you are wrestling with difficult financial choices and decisions. As always, CLG is ready to help you in any way that we can and will be happy to discuss your options and provide any assistance that you need. Should you have any questions about dealing with your debt, or your agricultural needs, please feel free to contact us.

About the Authors

Jeff E. Tate portrait photo.

Jeff Tate is a Director at Christensen Law Group, PLLC. He is an expert in banking, business transactions, litigation and bankruptcy. You can read more about him and his legal experience here.

Lisa M. Molsbee portrait photo.

Lisa Molsbee is a Director at Christensen Law Group, PLLC. She is an expert in employment matters, insurance, subrogation, appellate matters and litigation. You can read more about her and her legal experience here.

POSTED May. 5, 2020 | SHARE NEWS