By Joseph Kershaw "Kerk" Spong
On August 23, 2019, President Donald Trump signed the Family Farmer Relief Act of 2019 — legislation that amends the United States Bankruptcy Code, and in particular, raises the Chapter 12 debt limit from $4.1 million to $10 million. This new amendment will greatly expand the scope of financially distressed farmers who may be eligible for relief under the bankruptcy code. According to the American Farm Bureau, the measure will help family farmers struggling with export market disruptions, weather events and declining income.
Since agriculture plays such a huge role in the economy of South Carolina, the purpose of this article is to provide the Bar with a brief overview of Chapter 12 of the United States Bankruptcy Code and how it can help distressed farmers. It is my experience that not enough farmers nor members of the Bar are familiar with the tools available to address situations of financial distress until it is too late. While no one likes to file for bankruptcy protection, the sooner competent counsel is consulted, the more options are available.
Chapter 12 background
Chapter 12 was enacted by Congress in the 1986 as a specific section of the United States Bankruptcy Code to respond to the severe financial crisis challenging farmers.1 Throughout the 1980s, many farmers were stuck between a rock and a hard place when land values fell, and they had no ability to borrow money to finance their farming operations. As land values continued to fall, lenders would not extend credit to any farmers whose land values provided inadequate equity to secure existing loans. This situation made it nearly impossible for many farmers to finance necessary equipment or even the planting of crops. In fact, many farmers were going out of business because of this credit crisis.
This devastation put immense pressure on Congress to find a solution to help farmers reorganize. At that time, there were no available forms of bankruptcy relief that were specifically geared towards or especially helpful to small farmers. Chapter 11 — designed for large corporate reorganizations — was cumbersome, intricate, and very expensive, which made it ill-suited to the needs of farmers. Chapter 13 — designed for consumers to repay their debts over time — “was simpler and less costly.”3 However, “most farm operations exceeded the debt limits of Chapter 13 and relief under this chapter was too restrictive to be much help to farmers” because it was designed primarily for regular wage earners.4
Congress wanted to provide a bankruptcy reorganization process tailored specifically for the needs of small farmers. Congress sought to provide “the flexibility of Chapter 11 without the high costs and complexity of that chapter” and “the greater simplicity of Chapter 13” without “the lower debt limits or many of the other restrictions of Chapter 13.”5 In 1986, Congress enacted Chapter 12 specifically for the needs of small farming operations. In doing so, Congress took the power of bankruptcy reorganization to the next level, reaching its constitutional limits, and providing farming debtors with much more power to modify loans than any other Chapter of the Bankruptcy Code ever had. This “gave small farmers a formidable tool to use in re-structuring farm debt and saving financially struggling farms.”6
The primary goal of Chapter 12, like the other bankruptcy reorganization chapters, is to...