Congress Passes Bill to Increase Chapter 12 Debt Limit

Update: President Trump signed this bill into law on August 23,2019.

It’s been a long-debated issue, but Congress has now passed a bill to increase the debt limit for Chapter 12 bankruptcy eligibility.  On August 1, 2019, the Senate passed the Family Farmer Relief Act of 2019, a brief bill significantly increasing the amount of debt a farmer may have to be considered a “family farmer” eligible for Chapter 12 bankruptcy protection. The bill increases the debt limit to $10,000,000 from the $4,411,400 million current limit (indexed for inflation on April 1, 2019, from the statutory figure of $3,237,000). 11 U.S.C. § 101(18). The Senate action followed House passage of the bill, H.R. 2336, on July 25, 2019. The bill now awaits the President’s signature.

Proponents of the bill argued that the increase was needed since farm size and corresponding debt loads have risen dramatically since Chapter 12 was first instituted in 1986. Despite inflationary adjustments every three years since 2005, they argue that the debt limit has not kept up with the economic realities of modern farming. As such, some “family farmers” are prevented from using the Chapter 12 provisions that could allow them to avoid liquidation or foreclosure and continue farming in the wake of financial distress. Chapter 11, the business reorganization chapter of the Bankruptcy Code, is not a viable option for many of these farmers. Chapter 12 contains special tax provisions that better allow eligible farmers to “right size” their distressed operation and craft a feasible plan to repay their secured debt. Some tax debt associated with the sale of property is subject to priority stripping, meaning that these tax liabilities may be treated as unsecured debt and ultimately discharged. Without this special provision, tax liabilities would absorb substantial income otherwise available to create a feasible repayment plan. These farmers have no option but to liquidate.

The American Bankers Association opposed the change in a July 11 comment letter, arguing that the new limit could “ultimately increase the cost of borrowing for farmers and ranchers and reduce the overall availability of credit.” The letter included two charts illustrating challenges associated with the current agricultural economy.

We will be watching for the President's signature.