With ongoing trade disputes and a depressed farm economy, debt relief for farmers has been a hot topic. As farming and ranching operations have increased in size, farmers have taken on more debt in their operations. To allow for increased debt relief for farmers, Congress recently introduced the Family Farmer Relief Act of 2019. The bill aims to increase access to Chapter 12 bankruptcy by raising the Chapter 12 debt limit to $10 million, from roughly $4.4 million currently.

While Chapter 12 farm bankruptcy filings were down 1% throughout the U.S. in 2018, Kansas farmers continued to be hit hard by tariffs, low commodity prices, falling asset values and weather. Kansas had 35 Chapter 12 bankruptcy cases filed in 2018 – the second highest in the U.S. according to U.S Courts and Farm Bureau calculations, and 10 more filings than in 2017.

According to projections from the United States Department of Agriculture, farmers will continue to be under pressure in 2019 as farm income remains below historical averages while farm debt continues to rise. Just through the first quarter of 2019, Kansas’ nine Chapter 12 bankruptcy filings were more than any other federal district.

Chapter 12 bankruptcy allows family farmers to restructure their debt and propose a payment plan from future income. Upon the filing of a Chapter 12 case, farmers and their assets are protected by the automatic stay of bankruptcy. This means that lawsuits, garnishments, repossessions and foreclosures are generally halted once the case is filed. The automatic stay provides farmers with breathing room to assess their financial situation and propose a plan of reorganization.

A Chapter 12 plan usually runs for three years, but creditor payments (such as longer-term land debts) can extend beyond the term of the plan.  Debts and payment terms may be modified in a Chapter 12 plan. Among other things, Chapter 12 bankruptcy provides farmers with streamlined flexibility to restructure, right-size or liquidate their operation. During this process, farmers commonly sell or transfer certain lower-basis assets used in the farming operation, thereby generating a capital gains tax liability. Thanks to a 2017 revision to bankruptcy laws, such tax liability might qualify for favorable treatment as a dischargeable, non-priority unsecured claim in Chapter 12.

One of the biggest advantages of Chapter 12 bankruptcy is the debtor’s ability to reduce secured debts to the value of collateral, with repayment over a longer period of time. However, today’s Chapter 12 debt limit of just over $4.4 million prevents some financially distressed farmers from accessing the powerful relief that Chapter 12 bankruptcy provides. Often farmers with debt levels higher than the Chapter 12 debt limit are forced to sell assets to reduce debt, or file for relief under other chapters of bankruptcy not specifically tailored to farmers. If passed, the Family Farmer Relief Act of 2019 will give more farmers access to repayment flexibility and restructuring opportunities by more than doubling the current Chapter 12 debt limit to $10 million.

While economic trends affecting the agriculture industry remain difficult, Klenda Austerman’s bankruptcy professionals continue to help Kansas farmers and ranchers navigate financial challenges.  Klenda Austerman attorney Eric Lomas is uniquely qualified to help Kansas farmers in Chapter 12 bankruptcy. Eric has a farm background, he holds an undergraduate degree in agricultural economics from Kansas State University, and he has experience assisting farmers through all aspects of Chapter 12 bankruptcy.

You may contact Eric Lomas at elomas@klendalaw.com or at (316) 267-0331.

The information contained in this article is for general informational purposes only, and it is not legal or tax advice.