Farming: Was it Debt or Alive? The Chapter 12 Solution
By Hon. Catherine J. Furay, Western District of Wisconsin
The mid-1980s saw the worst farm economy since the 1930s. Low crop prices, high interest rates, and plunging land values combined resulted in more foreclosures and bankruptcies than had been filed since the Great Depression.
The debt carried by most farms exceeded the debt limits for a chapter 13. Thus, the only path to keeping the farm was a chapter 11. Most farmers who tried this failed. It was complicated and expensive.
In 1985, looking for an alternative, judges including Hon. George Paine from the Middle District of Tennessee and Prof. Frank Kennedy on behalf of the National Bankruptcy Conference[1] testified at early hearings on drafts of farm legislation. Many judges submitted written testimony or appeared at additional Congressional hearings.[2] The President of the National Conference of Bankruptcy Judges Ralph Kelley (EDTN) also presented testimony and submitted prepared statements and materials at another Senate hearing in December 1985.
The concerted efforts of bankruptcy judges, the National Bankruptcy Conference, with the support of Senators and Representatives,[3] lead to the passage of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. N. 00-554, 100 Stat. 3105 (1986). This subtitle of the law created Chapter 12. It could be used only by family farmers.
Chapter 12 borrowed many Chapter 13 concepts. It altered those provisions that were inappropriate for family farmers — the requirement that the plan be filed within 15 days of the petitions; the requirement that plan payments start within 30 days of the plan confirmation; and the low debt limits found in Chapter 13.
It included a seven-year sunset. Because this was a new chapter focused on a specific class of debtors, Congress wanted to evaluate both whether the chapter was serving its purpose and whether there was a continuing need for a special chapter for the family farmer.
In 1993 bills were introduced to extend Chapter 12 for another 5 years. Honorable A. Thomas Small, one of the principal drafters of Chapter 12, testified in support of an extension. Quoting testimony of Honorable Richard L. Bohanon, Judge Small told Congress that Chapter 12 has been beneficial in giving the financially distressed farm debtor “‘something when he comes to the negotiating table with the [lender]. Without that . . . he’s virtually helpless. He would only be liquidated.'” Judge Bohanon also testified that approximately 60 percent of the Chapter 12 cases filed had achieved confirmation and that of those confirmed cases, nearly 90 percent had been successfully completed.
The extension permitted Congress additional time to consider whether there should be a further extension or whether it should be made permanent. Once again Bankruptcy Judges testified, educated members of Congress, and submitted written statements.[4]
Senator Charles Grassley (R. Iowa) introduced The Working Family Farmer Protection Act of 1997 (S. 1024) in 1997. It was intended to make Chapter 12 permanent.
The National Bankruptcy Review Commission adopted a recommendation that the sunset provision should be eliminated. It also recommended increases in the aggregate debt limits to $2,500,000.
The Commission presented evidence that Chapter 12 generally provides financially distressed family farmers with an effective framework within which to reorganize their operations and restructure their debts. Chapter 12 saved literally thousands of family farms, stabilized farm values, and encouraged more out-of-court negotiations and settlements between lenders and farmers.
Despite the recommendations of the Commission and the testimony of judges, lawyers, and agricultural experts, Congress once again simply extended Chapter 12.
The original eligibility requirements in the legislation were an aggregate limit of $1,500,000. By 1997 it was recognized this amount had been set when land values were low. While farming continued to be a cyclic business, land valued had increased resulting increased leverage to purchase equipment, grow different crops, and further adapt. The changing cost of operating a family farm led the Commission to recommend increasing the eligibility cap consistent with inflation to $2,500,000. Once again, bankruptcy judges like Judges Small, Frank Kroger, Russell Hill, and Timothy Mahoney, persisted and persuaded Congress to pass a further extension with this change.
Through the tireless efforts of members of NCBJ, a series of extensions to chapter 12 were adopted by Congress.[5] Chapter 12 became permanent in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA also extended the scope of chapter 12 to include family fishermen.
The debt limit, however, did not keep up with the rising costs of operation, equipment, or debt that was incurred. Once again member of NCBJ and its Legislative Committee persevered with efforts to educate Congress about the importance of preserving this useful tool for family farmers and fishermen. In 2019 the debt limit was increased to $10,000,000.
Finally in 2025, the aggregate debt limits for a family farmer were increased to $12,562,250 and for a family fisherman to $2,568,000. Of more importance, these amounts are now subject to adjustment every three years.[6]
Chapter 12 continues to provide a balance between the rights and obligations of debtors and creditors. It affords a cost-effective mechanism for farmers and fishermen to retain their businesses while reorganizing and paying creditors. Without the hard work and persistence of the NCBJ Legislative Committee led by Judges Paul Black, Gregory Taddonio, and Deborah Thorne, these changes would not have been possible. Thanks!
[1] Both attended and testified at a Congressional hearing on March 27, 1985, in support of farm bankruptcy amendments to the Code.
[2] Bankruptcy Judges A. Thomas Small and Thomas Moore (EDNC) and Richard Stageman (SDIowa)testified in November 1985 to the subcommittee on Administrative Practice, Procedures and Courts of the Senate Judiciary Committee.
[3] Senators Thurmond, McConnell, Grassley, DeConcini, Burdick and Representatives Rodino and numerous others from California, Iowa, Oklahoma, New Jersey, Illinois
[4] Hearing on H.R. 5322 Before the Subcommittee on Economic and Commercial Law of the House Committee on the Judiciary 102d Cong., 2d Sess. 13 (1992) (Statement of Richard Bohannon, Chief Judge, U.S. Bankruptcy Court for the Western District of Oklahoma).
[5] For example, in 1997there was an extension into 1998. 1999 there was a 6-month extension. A series of additional extensions happened in 2002, 2003, 2004, 2017
[6] 11 U.S.C. § 104.