Category: Farm Management

There are two primary outcomes of Chapter 12 bankruptcy filings, discharge and dismissal.  The most common objective is the discharge of eligible debts.  After completing all the payments required under the Chapter 12 plan, the debtor will certify that all obligations have been paid.  At that time, the debtor can receive a discharge of eligible debt.  The discharge can release the debtor from all debts, with some exceptions.  Several debts will not be discharged, including child support and alimony payments.  Other debts that would not be allowed to be discharged are those that have been secured or restructured.  With restructured debts, the plan may allow for payments past discharge based on the type of asset and quality of the asset.  For example, claims secured by livestock may be allowed to be restructured over 5 to 10 years.

At the same time, a debtor may qualify for a hardship discharge.  A hardship discharge is allowed when the debtor fails to meet the plan payments through circumstances beyond the debtor’s control.  For example, if the debtor became seriously ill and unable to work during the plan, this potentially could lead to a hardship discharge.

An alternative to discharge of debt may occur when the court grants a dismissal order.  

Dismissals occur for a variety of reasons, including the failure to pay the filing fee, failure to file all required documents, or failure to make plan payments.  Additionally, debtors sometimes will request a dismissal when financial situations change, or negotiations result in the ability to pay back debt without further protection from the courts.

Figure 1 shows the breakdown of the most common outcomes in the southern U.S. bankruptcy cases that we have looked at in this four-part Southern Ag Today series. From October 1^st, 2012 to September 30^th, 2022, there was an equal percentage of discharged filings and dismissals.  Only 1% of the discharged cases were in the hardship category, with the other 99% resulting in some form of debt relief.  

Approximately 19% of the dismissed cases were for failure to make a plan payment.  This may occur when the bankruptcy repayment plan does not provide sufficient relief, or additional financial issues develop.  The remaining 81% of dismissed cases fall into the multiple dismissed categories previously discussed, although the data provided do not allow for identification between those groups.  However, it should be noted that some of those dismissed cases are voluntary, which can be viewed as an optimal decision by the debtor to exit the court process.  

What is apparent from these data is that filing bankruptcy does not provide automatic relief from dischargeable debt.  There is still a need to negotiate with the court and the creditors throughout the process.  The court protection can hold off other legal action and foreclosures, but this can also be achieved by early communication with creditors when financial problems become apparent.  If necessary, U.S. bankruptcy law does provide farmers with a unique court protection option.

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This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2022-67023-36112/project accession no. 1028056, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

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Rabinowitz, Adam, Paul Goeringer, and William Secor. “Outcomes of Chapter 12 Bankruptcy Filings.” Southern Ag Today 3(8.3). February 22, 2023. Permalink

At the start of the Chapter 12 bankruptcy filing process, a filer (the individual or business entity unable to pay back their debts) submits several pieces of information to officially file for bankruptcy. Included in this information is data on their assets and liabilities. The Federal Judicial Center collects and compiles selected data into a database for each case as of September 30^th of each year. Figure 1 below uses data from October 1^st, 2012 to September 30^th, 2022.

When analyzing these data, there are two important things to keep in mind. First, a filer is not always the whole farm. A farm may have multiple partners, and several legal entities (e.g., a sole proprietor and an LLC) involved. Therefore, the statistics presented here are strictly per filing, not per farm. Second, the data are compiled at the time of the filing with updates if the initial data has been appended. Throughout the bankruptcy process, new assets may be obtained, or new liabilities may be taken on. These data may not fully incorporate these changes.

Assets and liabilities listed on the debtor’s filing are placed into categories. Assets may be real property or personal property. Real property includes land, buildings, homes, and other such property. Personal property includes assets such as cash, vehicles, equipment, and tools.  Farm related inventory such as crops, animals, chemicals, feed, and machinery are included in personal property.

Liabilities or debt are categorized as secured, priority unsecured, and nonpriority unsecured. Secured liabilities are those debts with an asset used as collateral, such as a loan with farmland as the collateral. Priority unsecured debt is debt that has no collateral but has special treatment and may not simply be discharged like other unsecured debt. This type of debt includes any legal judgments or unpaid taxes. Lastly, nonpriority unsecured debt is debt that has no collateral securing it and requires no special treatment. This type of debt includes credit card and medical debt that may be eligible for discharge during bankruptcy proceedings.

Figure 1 shows the trend in average debtor assets and liabilities disclosed at filing over the last ten years. Following broader trends across the agricultural sector, assets and liabilities have increased, especially since 2016. Assets have had a smooth upward trend, likely following higher farmland and equipment values. Note that in all years, average liabilities exceed average assets. This is expected because debtors filing for bankruptcy are often insolvent.

On average, real property accounted for approximately 60 percent of a debtor’s total asset value. This suggests that land is an important asset that may be shielded during the bankruptcy process. On the liabilities side, secured liabilities, on average, accounted for over 75 percent of a debtor’s total liabilities. Additionally, nonpriority unsecured debt made up about 20 percent of this total, on average. This suggests that the Chapter 12 bankruptcy process is beneficial in two ways. First, secured debt may be restructured (e.g., lower interest rates or longer payment terms) or crammed down (e.g., reduction in total liability to current market value), making the debt more workable for the debtor while the debtor is able to retain ownership of the collateral (e.g., land). Second, a significant portion of total debt in the form of nonpriority unsecured liabilities may be discharged at the successful completion of the bankruptcy process.

This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2022-67023-36112/project accession no. 1028056, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

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Secor, William, Adam Rabinowitz, and Paul Goeringer. “Financial State of Chapter 12 Bankruptcy Filings.” Southern Ag Today 3(7.3). February 15, 2023. Permalink

During the farm financial crisis in the 1980s, Congress created a temporary title to the bankruptcy code designed to assist family farmers, which has since been expanded to help family fishermen.  This Chapter was set to expire in 1993 but was extended by Congress and made permanent in 2005.  Chapter 12 allows agricultural operations to reorganize, which the other Chapters do not allow.  The idea of this Chapter is to prevent debtors from needing to sell off assets and enable the operation to continue operating through the process.

Agricultural operations and fishermen must qualify for Chapter 12.  Current qualifications include:

• Engaged in farming or commercial fishing operations.
• Having total debt of less than $11,097,350 for a family farm or $2,268,550 for a family fishing operation.
• Total farm-related debts of at least 50% or fishing-related debts of at least 80% of all filer debt.
• More than 50% of the filer’s gross income originates from the farm or fishing operation.

One unique feature of Chapter 12 is the “cram down” provision.  The cram down allows the debtor to reduce the obligation on secured debt to the value of the collateral.  For example, suppose an agricultural operation has a secured debt of $200,000 secured by collateral valuing $100,000.  In a Chapter 12 case, the value of the debt would be reduced to $100,000, and the remaining $100,000 would become an unsecured debt.  This unsecured debt, like other unsecured debt, could be discharged in bankruptcy proceedings.^[1]

Data were obtained on Chapter 12 filings from the Federal Judicial Center for October 1, 2013 to September 30, 2022, representing Fiscal Years 2014-2022.  During this ten-year period, 4,284 Chapter 12 bankruptcy cases were filed in the U.S. courts.  Southern states, on average, make up 32% of the national Chapter 12 filings each year.  That proportion ranges between a low of 26% in 2020 and 2021 to a high of 37% from 2015-2017.  Figure 1 shows the percentage of cases filed during this period across the region in each southern state.  Georgia leads the region with 19.5%, followed by Florida with 12.9% and Texas with 12.8%.  The states with the least number of filings in the region are West Virginia at 0.9%, South Carolina at 2.1%, and Maryland at 2.2%.

Bankruptcy is not something that should be taken lightly.  It can have potential impacts on your credit down the road.  Before considering bankruptcy, you should always work with creditors to determine if more favorable repayment arrangements can be made.  Most creditors would prefer communication from debtors rather than silence.  Options other than bankruptcy may exist and working with creditors is always preferred before looking to the court for help.

Figure 1.

This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2022-67023-36112/project accession no. 1028056, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

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^[1] Like in some other Chapters, secured debt may be restructured. This restructuring may change the interest rate, maturity, or other terms of the debt agreement.

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Goeringer, Paul, William Secor, and Adam Rabinowitz. “Chapter 12 Bankruptcy as an Option to Relieve Financial Distress.” Southern Ag Today 3(6.3). February 8, 2023. Permalink

Photo by Melinda Gimpel on Unsplash

Bankruptcy is a legal process that allows those (a person or a business) that cannot currently pay back their debts or are struggling to pay back current debts to develop a plan that relieves the financial burden of those debts.  The person or business unable to pay back debts is known as a debtor.  This process allows the debtor to work out a process to repay outstanding debts to creditors and will eventually let the debtor make a fresh start.  Although it provides a fresh start, the bankruptcy filing may stay on the debtor’s credit report for several years and may limit the ability to borrow money.

            Bankruptcy falls under federal law, and types of bankruptcies are often referred to by their chapters in the U.S. Bankruptcy Code.  The main types of bankruptcy would be Chapter 7, Chapter 11, Chapter 13, and Chapter 12.  Chapter 7 is the most common form of bankruptcy and allows a debtor to liquidate all assets but those exempt from bankruptcy to pay off creditors.  Chapter 13 is another form of bankruptcy used by debtors with reliable income sources and some exempt assets.  Chapter 13 allows the debtor to reorganize, keep assets, and dedicate a portion of their income (usually 3 to 5 years) to pay off debts.  Chapter 11 is available to all U.S. businesses, allowing a debtor to remain in control of the business as a debtor in possession and reorganize the business to pay back debts.  Chapter 12 is a bankruptcy provision for qualifying family farming and fishing operations.  

Chapter 12 is designed to allow agricultural operations to reorganize in ways that the other Chapters do not allow.  Current qualifications include:

• Being engaged in a farming operation or commercial fishing operation.
• Having total debt less than $11,097,350 for a family farm or $2,268,550 for a family fishing operation.
• Total farm related debts of at least 50% or fishing related debts of at least 80% of all filer debt.
• More than 50% of the filer’s gross income originates from the farm or fishing operation.

Future posts will explore how Chapter 12 enables agricultural operations to reorganize and continue operating.

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This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2022-67023-36112/project accession no. 1028056, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

Author: Paul Goeringer

Senior Faculty Specialist, University of Maryland

Author: William Secor

Assistant Professor, University of Georgia

Author: Adam Rabinowitz

Assistant Professor & Extension Specialist, Auburn University

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Goeringer, Paul, William Secor, and Adam Rabinowitz. “Bankruptcy as an Option to Relieve Financial Distress.” Southern Ag Today 3(5.3). February 1, 2023. Permalink

The following information is for educational purposes. Each situation is unique, and it is strongly encouraged to utilize tax and legal professionals about this topic and others.

Income Averaging is a tax management tool that can be used by many farmers and commercial fishermen. It has been underutilized for some time but can provide benefits in many cases by reducing tax liability, depending on the facts and circumstances of the taxpayer. Income Averaging can also be used for capital gains, benefiting dairy and beef cow/calf producers who regularly cull their raised breeding livestock. 

The name of the tax management strategy is a bit misleading; it is not a true averaging of a farm’s income but allows for the utilization of potential unused lower-income tax brackets found within the three previous tax base years. Income Averaging uses the 1040F, Schedule J. Not all income can utilize this method, so the first thing that must be determined is which income is eligible to be averaged. This is known as electable income. Once the electable income is determined, you must specify the amount of income to be elected. The elected income then must be divided by three, and that value applied to each of the three base years. 

Utilizing Income Averaging, Schedule J does not affect the amount of income subject to income taxes owed. Furthermore, it does not affect Self-Employed Tax (Social Security, Medicare, etc.).

The chart below illustrates the following example. In this example, the Eli Willy Ranch, Eli is married and files a joint return. In 2019, Eli had a farm income of $72,000, in 2020 income of $65,000, in 2021 income of $70,000, and 2022 income of $110,000. Eli’s 2022 Federal Tax liability would be $15,405, not including Self-Employment Tax. But using the Income Averaging option, Eli’s Federal Tax liability would be $9,160, a savings of $6,250.

In many cases, even if the use of Income Averaging does not create tax liability savings, it may be advantageous to utilize Income Averaging to create a “hole” in the current tax year so that it can be used in future years with the hopes of higher income.

Please work with a trusted tax and or legal advisor about whether your situation can gain an advantage using Income Averaging. 

For additional farm tax publications and information, please visit ruraltax.org and IRS Publication 225, the Farmer’s Tax Guide.

Author: Dr. Adam Kantrovich

Extension Specialist, Clemson University.

akantro@clemson.edu