With the costs of farming and ranching continuing to trend upward, both sides of Congress are currently considering increasing the current bankruptcy Chapter 12 debt cap from $4.1 million to $10 million. This Family Farmer Relief Act of 2019, is designed to help more family farmers avoid going through foreclosure or a liquidation bankruptcy and allow them to continue their farming operation.
“While there certainly have been years farmers faced greater financial challenges than 2019, this may be a good time for farmers and lenders in North Dakota to be aware of proposed changes to the Chapter 12 bankruptcy laws,” said Bryon Parman, NDSU Extension agricultural finance specialist.
If passed, the Family Farmer Relief Act of 2019, by increasing the debt cap, will keep some farmers from avoiding the more complicated and restrictive bankruptcy avenues that include Chapter 7 and 11, Parman explained.
Chapter 12 was established during the farm income crisis in 1986, and is a unique form of bankruptcy for family farms and fishermen allowing for reorganization of current debt and developing a plan for future repayment over a 3-5 year period. There are limits on who may quality for Chapter 12. That, as well as other information can be found by searching https://www.uscourts.gov/ for Chapter 12 bankruptcy.
The main qualifications that need to be met include:
- The individual, or married couple, must be engaged in a farming operation
- Have at least 50 percent of the fixed debts related to farming
- Have more than 50 percent of the gross income from the preceding tax year coming from farming
- Have total debts not exceeding $4.15 million (increase to $10 million being considered)
In a recent joint letter to congressional lawmakers, the National Farmers Union and the American Farm Bureau Federation (AFBF) urged passage of the new Chapter 12 legislation.
“Our farmer members have experienced several consecutive years of weak commodity prices and the low profitability and poor farm income that follow. As a result, farmers and ranchers are watching their equity erode as their debt-to-asset ratios climb as debt financing reaches a 30-year high,” AFBF President Zippy Duvall and NFU President Roger Johnson wrote in the letter.
Closer to home, above-average yields the last few years for many North Dakota farmers has helped them financially, sparing those who might otherwise be in substantial financial trouble from having to make some tough choices this year.
Parman pointed to the fourth quarter of a 2018 survey of lenders for the Minneapolis Federal Reserve Bank, which reported a 46 percent increase in loan renewals or extensions in North Dakota, with 44 percent also expecting a decrease in net farm income heading into 2019.
The story is similar in other parts of the U.S., as the Kansas City and St. Louis Federal Reserve Banks expect higher loan demand in 2019 compared to the last three years.
Delinquency rates on ag loans have remained relatively low, though they have begun creeping upward recently. Those who have found problems meeting financial obligations have been aided by stable land prices and low interest rates, allowing for debt restructuring in a debt-friendly environment.
During the last 10 years, North Dakota has had relatively few Chapter 12 filings. According to the AFBF, of the 25 Chapter 12 filings, nine of them occurred in 2018. This compares with other states such as Nebraska at 154, Minnesota at 135, Georgia at 353 and California at 408 filings.
Though Chapter 12 has been a help to many family farmers and ranchers, the $4.1 million debt limit cap has kept many more from using it.
“Lifting the liability cap will expand access to the restructuring and seasonal repayment flexibility that many farmers need in today’s lagging farm economy, which is being further affected by trade disputes, projections for below average farm income over the next decade and rising interest rates,” Johnson and Duvall said in their joint letter, encouraging lawmakers to cosponsor the legislation and work for quick passage.
Anyone thinking of filing for Chapter 12, should consult with an attorney that specializes in bankruptcies, as well as visit https://www.uscourts.gov/.
“The plan submitted by the farmer must be approved by the bankruptcy court before you proceed,” he said. “You are going to move into a fish-bowl when you file Chapter 12 – your whole business is an open book. It is actually illegal to hide things and be dishonest about it.”
He concluded by saying, “Without the big yields North Dakota producers have enjoyed for the most part and well below breakeven commodity prices, some North Dakota farmers may find themselves in a situation where Chapter 12 protection is their only option. The Family Farmer Relief Act of 2019 could help increase the number of eligible operations.”