On July 25, 2019, the U.S. House of Representatives passes on voice vote H.R. 2336, which raises the debt limit for Chapter 12 eligibility from $4.4 million to $10 million. And both parties voted, “Aye”!
Who would’ve thunk it: bi-partisan action by a partisan political body, in today’s political environment?!
The subject of the bill is bankruptcy, no less. Which makes sense because bankruptcy issues are non-partisan and apolitical: that’s because nobody likes bankruptcy (even though it’s a practical necessity and authorized by the U.S. Constitution). And political partisans have a hard time getting worked-up over issues like cash collateral and adequate protection and absolute priority.
Farm income has declined since 2013 and the Federal Reserve Bank of Minneapolis has observed a rise in farm bankruptcies across the Midwest, especially among dairy farms. The lead sponsor in the House is freshman Congressman Delgado (D-NY) from a rural upstate district where dairy farms are prevalent and in financial trouble. His co-sponsor is Republican Congressman Sensenbrenner from Wisconsin, and they are joined by representatives from the plains states to California, where farmers have been hurt by a combination of low commodity prices, weather disasters and trade policy.
Here’s hoping, and expecting, that the U.S. Senate will quickly follow suit and pass its own version of the same bill (S. 897).
There are good reasons why H.R. 2336 passed the House in a bi-partisan matter. Here are a couple:
- The bill has strong support throughout the agricultural communities, supported by the American Farm Bureau and the American Farmers Union, groups that don’t always agree on ag policy; and
- The bill is supported by sound policy reasons—I’ll try to explain.
A Creditor Veto
What we learned in the 1980s Farm Crisis is this: in Chapter 11, creditors have a veto power over a farmer’s plan of reorganization. And in nearly every Chapter 11 case, back then, creditors exercised that veto and achieved an involuntary liquidation of the farmer’s assets.
Removing that veto power is a primary reason why Congress enacted Chapter 12, back in 1986. And it’s a primary reason, today, for raising the debt limit for eligibility.
Today, the total debts of most career farmers exceed the current $4.4 million eligibility limit for Chapter 12. So, if career farmers with too much debt need bankruptcy relief, they are kept out of Chapter 12.
If a family farmer with total debts of $4.5 million needs bankruptcy relief, Chapter 7 and Chapter 11 are the only paths available. And both involve liquidation: (i) Chapter 7 is a liquidation process—that’s all, and (ii) Chapter 11 proved, back in the 1980s, to be little more than hospice care for ailing farms before liquidation.
Statistics on the number of farmers can be tricky, because statistics tend to lump “hobby” farmers and “part-time” farmers (there are lots of those) together with career farmers. Here’s the distinction: “career” farmers make their primary living from the farm, while “hobby” farmers and “part-time” farmers don’t.
In other words, the current $4.4 eligibility limit accomplishes one thing, and only one: it provides relief for hobby and part-time farmers while keeping career farmers out of Chapter 12. H.R. 2336 and S. 897 would correct that problem for many family farmers.
Index to Inflation
Here’s how the Chapter 12 debt limit became a problem.
The current $4.4 million debt limit began in 1986 as a $1.5 million limit. But the $1.5 million amount has adjusted each year, since then, with the Consumer Price Index to its current amount.
The problem is this: changes in farming since 1986 have been greater than inflation—by a long shot! For example, farming in 1986 is labor-intensive, using small equipment (e.g., three bottom plows and four-row listers) on small acreages. Whereas, today, career farming is labor-lite, using huge equipment with computer precision on huge acreages. And debt loads have increased accordingly.
So, inflation adjustments since 1986 have been inadequate for Chapter 12 eligibility.
Impact on Credit Terms
A concern about Chapter 12 has always been that its effect will be to “tighten” credit terms and availability for farmers. And that concern is now in play, again, in this eligibility-increase context.
The concern, however, is misplaced. Here’s its fallacy: the alternative to reorganization under Chapter 12 is NOT paying creditors in full. Instead, the alternative is liquidation after a failed Chapter 11.
So . . . the adverse impact of repaying creditors <100% through reorganization should be no greater than repaying the same creditors <100% through liquidation.
Congrats to the U.S. House of Representatives for passing a bi-partisan bill on bankruptcy law that will help career farmers in financial straights.
Here’s hoping, and expecting, that the U.S. Senate will quickly follow suit!
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