Bills
| 3.23.22

Should the Debt Cap for Farmers to Declare Bankruptcy be Increased to $10 Million? (H.R. 2336)

Do you support or oppose this bill?

What is H.R. 2336?

(Updated August 26, 2019)

This bill was enacted on August 26, 2019

This bill — the Family Farmer Relief Act of 2019 — would expand the debt cap that can be covered under Chapter 12 bankruptcy from $3,237,000 to $10 million. This change reflects the increase in land values, as well as the increased average size of U.S. farming operations. 

Argument in favor

The increased size of farming operations in the U.S. has made many family farmers ineligible for Chapter 12 bankruptcy, so the current $4.2 million (adjusted for inflation) cap is too low and should be increased.

Argument opposed

The proposed $10 million debt limit in this bill is arbitrary and would expose bankers to significant risk. It’d also make too many large farm operations eligible for Chapter 12 bankruptcy.

Impact

Farmers; farmers in debt; farmers seeking Chapter 12 bankruptcy protection; and bankers.

Cost of H.R. 2336

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Rep. Anthony Delgado (D-NY) introduced this bill to ease the process of reorganizing debt through Chapter 12 bankruptcy rules and make more farms eligible for Chapter 12 amid a continued downturn in the farm economy: 

“For folks in Upstate New York, farming is more than a job—it’s a way of life. And in this extremely challenging farm economy, we must come together to help our family farmers overcome years of low prices and increased market consolidation. The Family Farmer Relief Act will provide the critical restructuring and repayment flexibility these folks need to get through these hard times without permanently closing their operations.”

After this bill passed the House Judiciary Committee, Rep. Delgado said: 

“Family farmers are facing alarming rates of foreclosure and this down farm economy is exacerbated by an outdated filing cap that leaves farmers without options to restructure or repay their debt. I am pleased to see House Judiciary Committee members on both sides of the aisle pass my legislation to get family farmers their long overdue debt relief. Today, the House took steps to bring the Family Farmer Relief Act closer to the floor so we can give our farmers and growers the flexibility they need to continue operations.”

House Judiciary Committee Ranking Member Jim Sensenbrenner (R-WI), an original cosponsor of this bill, adds: 

“Wisconsin’s dairy products are a staple of the American economy. However, our dairy farms are suffering. A recent report shows that small farms in Wisconsin are closing permanently at a rate of two per day. Among the myriad of challenges these farmers face is difficulty restructuring debt under outdated laws. I’m proud to sponsor this bipartisan, bicameral legislation to modernize our bankruptcy code which will help Wisconsin family farmers continue operating for years to come.”

Senate sponsor Sen. Chuck Grassley (R-IA) says: 

“For family farms whose assets are largely tied up in land and essential equipment, reorganizing debts can be particularly challenging when falling on hard times. As low commodity prices force farmers to take on more debt, this bill guarantees a safety net is in place for more farmers who need help getting back on their feet. By providing relief to these small-to-mid-size farms, we can ensure more successful reorganizations, which will be beneficial for everyone involved in the supply chain, while avoiding mass liquidations and further consolidation in the largest sectors of the industry.”

The American Farm Bureau supports this bill. Its president, Zippy Duvall, says: 

“Our farmer members have experienced several consecutive years of weak commodity prices and the low profitability and poor farm income that follow. As a result, farmers and ranchers are watching their equity erode as their debt-to-asset ratios climb and debt financing reaches a 30-year high. The double-whammy of nominal record farm debt and poor economic conditions have led many farmers to seek Chapter 12 bankruptcy as a debt relief and restructuring option.  Lifting the liability cap and giving more farmers an opportunity to qualify for Chapter 12 bankruptcy provides the restructuring and seasonal repayment flexibility that many farmers need in today’s lagging farm economy and will help to align bankruptcy law with the scale and credit needs of U.S. agriculture.”

Many bankers object to raising the debt cap for Chapter 12 bankruptcy. Mark Scanlan, senior vice president of the Independent Community Bankers of American (ICBA), says: 

“The $10 million number is an arbitrary number. Chapter 12 is supposed to be for 'family' farmers, not all farms in the U.S., (and) going to $10 million would make almost every farm eligible, including some of the largest farms in America.”

Scanlan adds that the higher debt limit increases risk to bankers, and argues that it’d be better for the government, rather than bankers, to accept increased risk by raising the loan limits on USDA-guaranteed loans to $2.5 million to assist family farmers before they go into bankruptcy. The American Bankers Association (ABA) concurred with the ICBA, also calling the $10 million limit arbitrary.

This bill passed the House Judiciary Committee with the support of 27 bipartisan cosponsors, including 18 Democrats and nine Republicans. 

This bill is endorsed by the American Farm Bureau Federation, National Farmers Union and California Farm Bureau Federation. 


Of Note: Several years of low commodity prices, stringent farm lending regulations and market uncertainty have taken a toll on American agricultural producers. In many farming regions across the country, farm bankruptcy rates are at their highest point in a decade. In 2018, farm bankruptcies doubled over 2017. Farmers’ debt levels are also approaching the historic levels set in the 1980s, further financially extending farm operations.

Testifying in favor of this bill at the House Committee on the Judiciary’s Subcommittee on Antitrust, Commercial and Administrative Law during a hearing on Oversight of Bankruptcy Law, Rep. Delgado described the state of the farm economy:

  • Farmers are currently facing a fifth year of declining net income due to low prices, high inputs and high uncertainty due to current trade policies
  • 2018 was the fourth consecutive year of rising bankruptcy rates as a proportion of the farm population
  • According to the USDA Chief Economist at the 2018 Agricultural Economic and Outlook Foreign Trade Forum, “net farm income is expected to remain flat over the next ten years, and when accounting for inflation, to fall in real terms”

To prove the need for this bill, Rep. Delgado cited numbers from the National Farm Bureau, which reports that only 498 farms filed for Chapter 12 bankruptcy in 2018, compared to nearly 766,000 consumer filings through Chapters 7 and 13. Over the past decade, Chapter 7 and Chapter 13 have seen 10 million total filings, compared to only 5,039 Chapter 12 filings. He concluded, “the current debt cap has rendered Chapter 12 an inaccessible tool for today’s farm families.”

Chapter 12 bankruptcy was created in 1986 in response to the poor economic conditions plaguing agriculture, including low commodity prices, low farm income, record farm debt and tight agricultural credit markets. It’s modeled after Chapter 13 bankruptcy, and provides reorganizational advantages and financial relief specifically for family farmers in debt. Among its advantages, Chapter 12 has a seasonal repayment schedule over a three- to five-year period and lower costs relative to other chapters. For farmers filing under Chapter 12, this option provides a quick and predictable process to reorganize debt to avoid asset liquidation or foreclosure.

Before 2005, the Chapter 12 liability cap was $1.5 million. In 2005, it was raised to $3.2 million. After adjusting for inflation, the limit is now $4.2 million. Meanwhile, relative to 1982 in nominal dollars, production expenses in agriculture have increased by 198% and farm debt has increased by 182%, whereas net cash income has grown by only half that figure. According to USDA data, the average value of U.S. cropland and the per acre value of farm assets overall, have both more than doubled since the $3.2 million cap was set 14 years ago. Thus, the American Farm Bureau observes that “[t]hough Chapter 12 has been a help to many family farmers, its $4.1 million debt limit ke[eps] many more from using it.” John Newton, chief economist at the American Farm Bureau, adds that a $10 million liability cap “reflects the modern credit needs of agriculture” at a time when farms are growing.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / FlairImages)