Family Farmer Relief Act of 2019
The media is full of stories about the financial crunch hitting America’s farmers. Now, a new law will make it easier for family farmers to deal with financial distress and save their farms.
In its entirety, the Family Farmer Relief Act of 2019 reads, “Section 101(18) of title 11, United States Code, is amended by striking ‘$3,237,000’ each place that term appears and inserting ‘$10,000,000.’” Big things can come in small packages, and this one-sentence law could prove to be a game changer for distressed farmers in the Midwest and across the country.
The meaning of these words is to make more farmers eligible for chapter 12 bankruptcy relief. Chapter 12 first became law in 1986 as a reaction to the farm crisis of the 1980s.
People are more familiar with chapter 11 bankruptcy, which is most often used by corporations having financial difficulty. Chapter 11 is not well suited to resolving the financial problems of family farmers. First, it is very expensive and time consuming. Second, if the owners of a company in chapter 11 want to keep any shares in the company, the law requires creditors to be paid in full. That rule makes a lot of sense where the owners’ interests are strictly economic but a lot less sense where the owners have noneconomic interests, such as preserving a way of life that goes back generations.
The idea of chapter 12 was to establish a hybrid procedure between a full-blown chapter 11 and an individual consumer bankruptcy. It is hardly a free ride. At the heart of chapter 12 is a requirement that the debtor use a repayment plan. Creditors who have collateral must receive payments equal to the value of that collateral over time. Creditors without collateral receive for three years a proportional share of all the debtor’s net income after paying necessary household and business expenses.
Chapter 12 is available to individuals and companies who have at least fifty percent of their debts and income coming from farming operations. The key feature of the new law is to raise the debt limit for eligibility to $10 million, which will be adjusted for inflation in the years to come. Chapter 12 bankruptcies for 2019 already were on a pace to be even higher than they were in the Great Recession from ten years ago. Even with near-record levels of chapter 12 bankruptcies, there was a sense that the lower debt limit was preventing farmer from getting the debt relief they needed. With FDIC banking statistics showing agricultural loan delinquencies at a six-year high and the new law, the number of chapter 12 bankruptcies likely will grow.
The new law also will have an effect outside of bankruptcy court. Parties always bargain in the shadow of the law. That is, settlements are reached based on the expected outcome if a case goes to court. Farmers will not necessarily need to file bankruptcy to benefit from the new law. The expanded relief should bring banks to the bargaining table to try to reach negotiated solutions to debt problems, which almost always produce the most benefits for both sides.
Although the new law received the support of many farm groups, it was opposed by the American Bankers Association who said it would “increase the cost of borrowing for farmers and reduce the overall availability of credit.” In fairness, academic research does tend to show that pro-debtor laws do sometimes raise the cost of credit, but the effects tend to be small. Essentially, these effects are a type of insurance against financial distress. Everyone pays a small bit more but knows that if things go horribly wrong, they have a safety net to protect them from catastrophe. And, the new law will do exactly that.