A brief Twitter exchange prompted me to brush up on my farm bankruptcy basics. As is now too often the case, what I thought I knew was shaky, and what I didn't know/remember considerable.
First, I hazily remember farmers getting their own special category of bankruptcy during the depths of the '80s.
Chapter 12 Bankruptcy: Adjustment of Debts of a Family Farmer with Regular IncomeChapter 12 Bankruptcy provides debt relief to family farmers with regular annual income. Chapter 12 Bankruptcy is very similar to Chapter 13 Bankruptcy because both of these bankruptcy options allow the debtor to propose a plan of debt repaymentover a period of three to five years, as well as a trustee is assigned to the case who is responsible to oversee the bankruptcy process and disbursement of payments to the creditors. Chapter 12 Bankruptcy allows a family farmer to continue to operate the farm while the plan is being carried out. [More]
The biggest differences are debt limits, costs, and creditor rights. In Chapter 12 all these favor the farmer more than the alternatives. A partial summary:
[Source][click image to embiggen]
Some more detail (11, 12, 13 - l to r):
The other thing that I noticed is creditors don't get to approve Ch 12 plans - only the trustee (court appointed). This prevents battles between creditors forcing dissolution.
This whole discussion began when lawyers pressed the Chair of the Senate Judicial Committee.
With agricultural lenders fearing a tidal wave of farm bankruptcies as soon as this spring, lawyers in the Midwest say they want U.S. Senator Chuck Grassley of Iowa to raise the debt limit for so-called "family farmer" bankruptcies.Farmers in states like Illinois, Indiana and Iowa are scrambling to secure lending for the 2016 growing season at a time when prices for their corn have halved from three years ago.Many younger farmers, who tend to be more cash poor than their elders, are expected to be among the hardest hit by stubbornly high input costs such as fertilizer and seeds and souring export sales.As they seek restructuring advice, many are told their debts surpass the $4 million limit for a Chapter 12 family farm bankruptcy, said at least five lawyers who represent either debtors or creditors.They say the $4 million cap is out of touch with most farms' current operating size, often thousands of acres of land paid for by expensive leases and worked using tractors that can cost more than $250,000."The debt limit for Chapter 12 bankruptcies should be raised to at least $10 million," said Joseph Peiffer, a bankruptcy attorney in Cedar Rapids, Iowa. [More]
I'm not sure if Grassley is hearing increased rumors of rising numbers of farmers seeking debt relief, but this move is rooted in a familiar pattern: farmer wealth is not like other wealth.
This makes no sense economically or financially, but it sure resonates with farmer feeling of exceptionalism. It is the same bias that generates disturbingly self-righteous statements about estate taxation, for example. Our wealth (land) is different because we use it for our way of life, unlike mere stocks or cash. (I've dealt with this in TP before).
But that's an old debate. What is more useful perhaps is to see if this is a fight worth having. Do farmers use Chapter 12 often? Are we going to battle for a tiny number? More to the point, does CH 12 have better results?
Farmer bankruptcies have always been a very small proportion of total farm numbers. Bankruptcies have been relatively more numerous, as would be expected, in periods of farm sector financial problems following periods in which debt had increased substantially. But the farmer bankruptcy cases per year are typically less than 0.1 percent of the total number of farmers and are measured in bankruptcies per 10,000 farms. The number of farmer bankruptcies occurring from year to year appears to lag behind the movement of farm prices, farm income, and other economic conditions that are the primary causes of insolvency. Bankruptcy law is a blunt policy instrument overhanging the workings of the credit markets, rather than being finely tuned to specific subgroups. Bankruptcies occur during both prosperous and troubled economic times, but the effect of the law obviously is much more noticeable when times are hard. Chapter 12 has allowed some financially stressed farmers to continue farming, but the shortrun gain to financially stressed farmers comes at the expense of some creditors and, ultimately, other borrowers. Chapter 12, a special section in the Bankruptcy Code enacted in 1986 in response to the farm financial crisis, was originally scheduled to expire on October 1, 1993. But it has been extended 10 times and has succeeded in keeping some farmers in business and encouraged informal lender-farmer settlements out of court. However, it increases costs by encouraging both inefficient farmers who would otherwise liquidate and efficient farmers who would otherwise continue their operations at greater expense to reorganize their businesses and charge off part of their debts under the protection of bankruptcy. Some of these costs could be mitigated by allowing lenders the option of recapturing writedowns of secured debt if asset values increase subsequent to the writedown. Chapter 12 gives family farmers in financial stress more power to demand concessions from lenders than does Chapter 11. Chapter 12 was not necessarily designed to frame creditor negotiations, but it has had that effect. Under Chapter 11, where farmers desiring to reorganize typically filed before Chapter 12 became effective, creditors could more easily block the debtor’s plan and force liquidation. The availability of Chapter 12 to eligible farmers encourages creditors to negotiate debt-restructuring arrangements outside bankruptcy. But the effect may also include lenders’ restricting credit and raising interest rates to some degree. The decreasing discharge rate over time may indicate that more farm debtors are negotiating successfully with their creditors outside of Chapter 12. Chapter 12 thus has had a larger historical impact than what is indicated by the number of cases filed annually. The threat of possible Chapter 12 actions by farmers is an enduring possibility facing agricultural lenders. But debt-restructuring laws, such as Chapter 12, requiring debt writedown do not necessarily mean higher loan losses, as long as the value of restructured debt is greater than the amount the lender would receive through foreclosure. However, the risk of future default on the restructured debt is still present, and is an unknown cost to the lender. Because the lender in Chapter 12 loses the opportunity to recoup loan losses when restructured loan collateral appreciates in value, these higher costs are borne by the lender. [More][My emphasis]
So, unless Sen Grassley has reason to think a much larger than usual numbers of large farmers are in serious difficulties, this looks to me like simple constituent politics. Perhaps some powerful farm donors have whispered in his ear, but without more information this seems like a gift to a favored few producers ( and their lawyers).