My comments a few weeks ago about Chapter 12 bankruptcies included one whopping error and disagreement from viewers.
First, from David in IL:
“About everything you said [was] pretty much incorrect. [The limit for Chapter 12] is based on your debt not your assets.”
David is absolutely right. I simply misread the information and I apologize for the blunder.
I also received a thoughtful reply which I will include in full on the web from John Schwarz II in Hudson, Indiana:
“What concerns me most about your article is that, respectfully, and in my humble opinion, it casts a negative light on Chapter 12. The farming industry is, I fear, going to be in dire straits for quite some time. There is already a stigma with Chapter 12, even where there should not be. There should be more discussions as to why Chapter 12 should be a button that can be pushed without fear of being lumped into the deadbeat category.”
Let me be more succinct about my positions.
- I support the need for bankruptcy laws, and especially for cases of misfortune like medical expenses.
- I cannot find compelling evidence that special procedures for farmers or businesses result in better final results for participants or creditors compared to Chapter 7. I am willing to be proven wrong, but outcome statistics are hard to find. Mine is a “rip the bandaid off rapidly” position.
- Agriculture is more vulnerable to bankruptcy inefficiencies and distributed expenses due to input and lender consolidation.
- The bankruptcy industry in the US is enormous, expensive and adds deadweight to our economy. My brother who is a doctor always joked that the motto for surgeons was “There’s nothing wrong with you that an expensive operation couldn’t prolong”. This is cynical, but contains a grain of truth for surgeons and bankruptcy attorneys as well.
- Finally, constantly referring to victimhood for this legal process is unhelpful. In fact, the bankruptcy industry spreads rather the helps victimization.
I understand how my opinion could be seen as harsh and uncaring. But I truly believe we have developed a system that too often does prolong suffering and prevent recovery.
Email from John Schwarz II in Hudson, Indiana:
I read your article “Possible Fallout from Raising Bankruptcy Cap”. I then asked a colleague of mine, Doug Adelsperger, to do the same. Doug has much more experience with Chapter 12 than I, so I thought it wise to ask for his input.
To begin, in the 13 years I have been an Ag attorney, I can count on one hand, maybe even half a hand, the number of farms I have had to help with financial matters. This year alone, I have roughly 10, and the phone keeps ringing. Half I have been able to negotiate a forbearance or otherwise. The other half are in progress.
What strikes me the most is the downright resistance some of the lenders have to working with the farmer. Worse, these lenders “pile on” with default interest rates, penalties (one client is getting socked with 80k in penalties), “set offs” where they take the money out of the bank account leaving the farmer with no cash, attorney fees, etc. This “piling on” often leaves the farmer deeper in the hole than before the default occurs.
Without Chapter 12 as an option, which I have had to remind some of the lenders is available to the farmer, in most instances the farmer has no viable options. So, just having Chapter 12 as an option makes a difference.
In your article, you state ”I think we need different splits for different types of failures, but I am wary of making it easier just for farmers”. Nothing in the Family Farmer Relief Act of 2019 makes it “easier” for farmers to declare bankruptcy, and your statement that it will be easier for farmers is incorrect. As you know, the Act merely raises the ceiling so more farms can have the Chapter 12 option. With the cost of a new combine approaching 500k, or already there, as farmers you and I can appreciate that 4 million dollars is not realistic for a lot of farms. After all, why should a farm with 3.9 million in debt have Chapter 12 as an option, but not one with, say, 4.3 million in debt.
You also state “Basically, bankruptcy is a way an individual who cannot pay their debts can get of the down spiral” Often such is the case, but that statement is not accurate. What about the farm that gets hit with a multimillion dollar judgment for an accident”. What about the farm where the lender calls the note, on a whim, which lenders can do? What about the farmer who gets rocked by a divorce? These situations are not derived from the simplistic fact one cannot pay their debts.
The main thrust of your article is that those creditors that are not fully paid back by a chapter 12 will likely pass the loss on to their customers. I asked Doug about this and he confirmed that, yes, in Chapter 12 the farmer only has to pay back an amount equal to or greater than if liquidated. Thus, if the liquidated value of assets after paying secured debt is not enough to pay unsecured creditors in full, those unsecured creditors can and will get less than full pay-back. In essence, the under-secured or unsecured creditor takes the hit in bankruptcy.
There are two sides to this concern. However, first, businesses have the ability to write off the amount as “bad debt”, which does not leave them empty handed. Second, a lot of this is already built into the cost of doing business. John Deere said when it started Ag lending they knew they were going to lose some, but that was offset by keeping farmers in business so they had machinery customers.
What concerns me most about your article is that, respectfully, and in my humble opinion, it casts a negative light on Chapter 12. The farming industry is, I fear, going to be in dire straits for quite some time. There is already a stigma with Chapter 12, even where there should not be. There should be more discussions as to why Chapter 12 should be a button that can be pushed without fear of being lumped into the deadbeat category.
If you have not had anyone on the show that has discussed some of these Chapter 12 bankruptcy matters, I would be happy to come on and we could cover some of them. John, I fear we are in for a long and protracted downturn. Farmers need to have a solid understanding of the basics of Chapter 12 so they can make informed decisions.
John J. Schwarz, II
Schwarz Law Office, PC
Gatekeepers: Ag Leadership Programs Shape Future Leaders
Technology Is Cutting Animal Health Costs