- November 3, 2024
- Kelvin Birk
- Bankruptcy
Farmers have always faced unique challenges for survival, such as extreme weather and seasonal and market fluctuations that can negatively impact their income, so it is not uncommon for them to be in a situation where they are faced with filing for bankruptcy.
Small farmers often struggle the most because they do not have the financial resources of larger corporate farming operations. Recognizing the importance of the farming industry, the United States created a special type of bankruptcy – Chapter 12 — that makes it easier for family farmers to file and get out of debt. If successful, Chapter 12 allows farmers to discharge certain debts while protecting their land and other valuable assets that allow them to continue to farm.
Chapter 12 was introduced in as a temporary measure in 1986 and became permanent in 2005. The number of filings fluctuates greatly each year. For example. the third-highest number of farm bankruptcy filings (595) occurred in 2019; farm bankruptcies in 2022 were the lowest (169) since Chapter 12 became permanent, and that figure was down nearly 39% from 2021. In addition, the number of farm bankruptcies differs in different regions of the country, depending on how various factors such as fires, drought, and flooding affect that area.
If you are a farmer considering filing for bankruptcy, a skilled Chapter 12 bankruptcy attorney can help by examining your individual situation and reviewing available options to discuss whether Chapter 12 bankruptcy or some other debt-relief solution is the way forward that makes the most sense for you.
Why Farmers File for Bankruptcy
There are many reasons why farmers declare bankruptcy. There is always the possibility of crop failure, and climate change brings challenges that can harm the quantity and quality of produce. Several years of substandard harvests, blights, or drought can leave a farmer unable to pay their basic operating expenses. To combat this, they use increasing amounts of artificial fertilizers, which can have diminishing returns.
The following are among the most common reasons farmers file for bankruptcy:
- Financial pressures: Farmers often have to take out loans to finance operations before profits from crops come in. Low commodity prices and extreme weather conditions make it difficult to repay loan debt, and farmers who extend repayment terms on loans are under increased pressure. Retaliatory tariffs on U.S. agricultural goods have exacerbated financial challenges.
- Poor growing conditions: Several years of poor growing seasons compound financial difficulties. Regions that suffer from drought, extreme temperatures, flooding, or fires are especially affected. Many commodity crops like corn, soybeans, wheat, rice, cotton, and oats don’t grow well above certain temperature thresholds. For every degree Celsius of global temperature rise, there’s an estimated 5-15% decrease in overall crop production. The impacts on crop yields can cause prices for animal feed and ethanol to rise, potentially disrupting marketplaces at home and abroad.
- Dominance of major supermarket chains: The buying power of major supermarket chains results in less competition in the marketplace, especially when specific chains dominate particular regions. Farmers lose negotiating power and large corporate entities have control of prices.
- Labor issues: Needs for farm workers are seasonal, and it can be difficult to find adequate labor due to issues with migrants and fluctuations with employment. When unemployment is low, cost of labor may increase, but high unemployment rates during recessions can impact income as customers are financially strapped.
- Personal problems: Health issues are particularly challenging for family farmers who may not have any sponsored health insurance options. This could lead to massive financial issues if someone faces highly expensive medical issues like cancer or major surgery. If a farmer faces a divorce situation and has to share the value of their agricultural enterprise with a spouse, it can lead to a bankruptcy filing.
Many farmers face a combination of these factors which leaves them in a situation to consider Chapter 12 bankruptcy.
What is Chapter 12 bankruptcy?
Chapter 12 bankruptcy is specifically for family farmers and fishermen who have “regular annual income” from their operations and wish to repay all or part of their debts and get a fresh financial start. Under Chapter 12, debtors come up with a plan to repay creditors over a 3- to 5-year period under terms that are more favorable for reorganization, and more accessible and less complicated and expensive than a Chapter 11 or Chapter 13 bankruptcy proceeding.
The law governing Chapter 12 farm bankruptcies was significantly changed in 2019 to make it easier for farmers with larger debts to qualify for Chapter 12. Chapter 12 allows for higher debt limits compared to other bankruptcy chapters: up to $11,097,350 for family farmers and $2,268,550 for family fishermen. The plan generally provides for payments over three years unless the court approves a longer period “for cause.” There are certain “cramdown provisions” that provide more favorable treatment of secured claims, allowing debtors to reduce secured debts to the value of the collateral, and there are certain income tax advantages over other bankruptcy options as well.
To file a Chapter 12 bankruptcy, an individual or family-owned operation must meet specific criteria, including deriving a significant portion of their income from farming or commercial fishing and having a total debt below certain thresholds to make sure that their annual income is sufficient to meet payments. In addition, they must participate in credit counseling. Filing the petition for Chapter 12 will immediately trigger an automatic stay, which provides relief from creditor pressure. The bankruptcy may be discharged after all payments have been made, leaving farmers and fishermen in a better financial situation.
If qualified for Chapter 12, farmers can choose from a variety of bankruptcy options, which the Birk Law Firm would be glad to explain. As a farm owner who understands the agricultural life, attorney Kelvin Birk is well versed on all of these bankruptcy options and can help you decide which direction is best for your unique circumstances.
Get Legal Assistance Filing For Bankruptcy
Throughout the Chapter 12 process, you must adhere to certain requirements, cooperate with the trustee, provide required financial information, and possibly attend additional hearings or meetings. The procedure is complicated, so it can help to work with an experienced Missouri bankruptcy attorney.
Attorney Kelvin Birk can provide you with the most up-to-date, informed, and strategic guidance about bankruptcy options. A farmer himself and a CPA as well as a bankruptcy attorney with more than 30 years of experience in accounting and tax and business consulting, Kelvin helps agricultural families navigate the complexities of both Chapter 12 and Chapter 13 bankruptcy. At Birk Law Firm, we know that farming is at the heart of agricultural families, and deciding to make a change has not only financial implications but lifestyle implications, too. Chapter 12 is a family decision with far-reaching outcomes.
Call us at 573-332-8585 today for a free consultation to start working toward a brighter financial future.
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Attorney Kelvin Birk
Kelvin Birk is a lawyer as well as a certified public accountant, with more than 30 years of experience in accounting and tax and business consulting, and more than 20 years of experience in numerous legal matters. This combined expertise allows our law firm to provide a level of service above that of other firms. Whatever your legal situation, your attorney at Birk Law Firm can counsel you as to the tax implications. We have experience in providing myriad legal representation services to residents of southeast Missouri and other areas.. [ Attorney Bio ]
