Chapter 12 Gets an Increase

Published on: 06:05AM Oct 21, 2019

Chapter 12 bankruptcy rules were put into effect as a result of the 1980's farm crisis.  Up to the that point, there were two primary bankruptcy statutes - Chapter 7 (a full liquidation) and Chapter 11 (a work-out).

Chapter 12 was added specifically for farmers (and fisherman) to allow them to get relief from some debt; keep the farm; and hopefully get back on their feet.

There have been fewer Chapter 12 bankruptcies over the last several years.  This was not due to farmers having issues but rather the limit on the amount of debt a farm could have was about $4.3 million.

On August 23, 2019, the Family Farmer Relief Act of 2019 was signed and it increases this debt limit to $10 million.

It did not take much real estate, operating and equipment debt to go over $4.3 million, so this new Act will provide much needed relief for those farmers with debt over $4.3 million and under $10 million.

Also, the tax laws dealing with Chapter 12 have changed.  Under the old law, if a farmer sold assets before they filed, the tax associated with that gain was not a preference item.  It was usually considered to be like any other unsecured debt and could be discharged.  However, if the farmer sold the asset after filing to help pay down the debt as part of the plan, this tax would become a preference item and could not be discharged.  This created major issues for many farmers.

The new rules in many cases now allow the farmer to either sell the asset before or after filing and still have the tax not be a preference item.  However, this can be very complicated so it is always wise to seek appropriate counsel if you are in this situation.