by Johnathon Cottingim

In the agricultural community, the word “bankruptcy” can be a dirty word. It may feel like a scary scenario. However, there are times when bankruptcy, particularly Chapter 12 bankruptcy, may be a useful tool for farm families.

The current agricultural economy has some concerned that financial struggles lie ahead. High interest rates, input costs and debt-to-equity ratios, coupled with low commodity prices, are creating the perfect storm for farm financial challenges.

When most farmers hear “bankruptcy,” they think liquidation and the end of the farm. That does not have to be the case.

If you are facing financial strain, Chapter 12 bankruptcy could relieve the tension without losing your operation. Chapter 12 was passed as a temporary response to the 1980s economic crisis in the agricultural industry.

After extending Chapter 12 several times, Congress took permanent action with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The act made Chapter 12 a permanent feature of the bankruptcy code.

Since Chapter 12 provides several benefits to family farms that are not available in other chapters, it is only available for family farms that meet the statutory requirements. For example, when you file for Chapter 12, it automatically stops most of the collection actions against you and allows you to continue operating in the meantime. Additionally, it allows for a three- to five-year plan to be put in place to get debts resolved, and even allows for some payments to be extended beyond that period for some expensive property.

Another major benefit is in the flexibility of payments. Under Chapter 12, payments can be made as farm revenue comes in — rather than every month, as required in other types of bankruptcy. Perhaps the biggest benefit of Chapter 12 bankruptcy is that it does not require a liquidation. The whole point is to allow farmers to retain their assets and continue farming while servicing their debts.

Chapter 12 bankruptcy also provides for a “cram down” on some debts. “Cramming down” essentially allows the debtor to lower the amount of the secured debt they owe. This is accomplished by decreasing the loan to the current sale value of the collateralized item, regardless of the loan principal amount. For instance, if the debtor still owes $200,000 on a combine, but it is only worth $125,000, the principal amount of the loan can be lowered to $125,000.

Remember, if your farm is facing financial strain, you do not have to lose everything. Through Chapter 12, you can rein in your debts, reorganize your operation and potentially continue to farm.

For a more detailed review of how Chapter 12 works and the requirements to qualify, visit nationalaglawcenter.org.

Cottingim is a junior associate in farm succession with Wright and Moore Law in Delaware, Ohio. Contact him at [email protected] or 740-990-0750, or visit ohiofarmlaw.com.