Bankruptcy Law Issues in the Context of the Current Ag Economy

DTN Ag Policy Editor¬†Chris Clayton reported yesterday that, “While there is often discussion about how the downturn in the farm economy compares to the 1980s, some policies created in the 1980s to help distressed farmers haven’t kept up with the times.

“Joe Peiffer, a bankruptcy attorney from Cedar Rapids, Iowa, highlighted growing complications for farmers under Chapter 12 bankruptcy, a filing status updated in 1986 specifically to help family farmers and small-business fishermen.

One of the problems with is that farmers in states with higher land values likely don’t qualify for Chapter 12 bankruptcy any longer. ¬†The problem is the debt limit allowed for Chapter 12 caps total debts on the farm at $4,031,150. Too many clients coming into his office looking to restructure debt have too much of it to fit into a Chapter 12 bankruptcy. ‘I’m running that 60% to 80% of the clients who come in are too big for Chapter 12,’ Peiffer said. ‘But they are not too big to fail.'”

The DTN article stated that, “Chapter 12 allows farmers to restructure debt without the formation of a creditors’ committee. Peiffer said such committees ‘can be notoriously difficult to deal with’ in a Chapter 11 bankruptcy. Debt collection stops and the farmers are afforded a change to put together a payment plan that generally requires three-to-five years to repay for secured creditors.

“While Peiffer said more producers are looking for debt relief, their finding Chapter 12 is becoming a bigger problem, not just because of the debt limit, but also because of Supreme Court ruling. The numbers in recent years somewhat bear that out.”

Mr. Clayton explained that, “Chapter 12 generally allowed farmers to claim ‘any tax … incurred by the state’ as a dischargeable, unsecured liability. But the IRS pushed a challenge on a case in which the farmers filed for bankruptcy, then sold their farm. The IRS won a 2012 U.S. Supreme Court case by splitting hairs defining taxes generated by the individual farmer and the estate created by the bankruptcy filing.

“The Supreme Court declared, in a 5-4 case, that capital gains on a farm liquidation cannot be discharged. (This change affected most business bankruptcies, by the way, not just farmers).

“Essentially, the Supreme Court ruling forces that any taxes waived under Chapter 12 must have been incurred on a farm in the year before a farm files for bankruptcy. Otherwise, the taxes remain outstanding.”

Yesterday’s DTN article added that, “Peiffer stressed that Congress needs to reverse the impacts of the Hall case so producers aren’t stretching into rapid liquidation while also stretching their operations into the next calendar year before they file bankruptcy. Further, the $4,031,150 debt limit for Chapter 12 needs to be changed or farmers in several states simply are going to have too much [debt] to qualify for filing under Chapter 12.”

This entry was posted in Agriculture Law. Bookmark the permalink. Both comments and trackbacks are currently closed.