19 January 2016

Inside Bankruptcy Baseball: Increasing Debt Limit for Chapter 12 Bankruptcies

I've often posted about Midwestern farmers including taking their fertile land for granted (here), absurd prices for that land (here), and their corporate welfare by means of ethanol subsidies (here and here). Lately, it appears that the wealth of those same farmers may be cresting. Exhibit 1 is the following news blurb:

With agricultural lenders fearing a tidal wave of farm bankruptcies as soon as this spring, lawyers in the Midwest say they want Sen. Chuck Grassley (R-Iowa) to raise the debt limit for so-called "family farmer" bankruptcies, Reuters reported yesterday. Farmers in states like Illinois, Indiana and Iowa are scrambling to secure lending for the 2016 growing season at a time when prices for their corn have halved from three years ago. As they seek restructuring advice, many are told their debts surpass the $4 million limit for a chapter 12 family farm bankruptcy, said at least five lawyers who represent either debtors or creditors. They say the $4 million cap is out of touch with most farms' current operating size, often thousands of acres of land paid for by expensive leases and worked using tractors that can cost more than $250,000. "The debt limit for chapter 12 bankruptcies should be raised to at least $10 million," said Joseph Peiffer, a bankruptcy attorney in Cedar Rapids, Iowa. Without a new limit, farmers would be forced into a more costly chapter 11 filing. (Emphasis added.)
In other words, rather than saving their windfall profits, many farmers bought land at prices that could be justified only by a belief--wrong as it's turned out--that commodity prices would ever-continue to increase. I suspect that the only thing's that's kept the foreclosure wolf at bay has been the even more precipitous fall in the price of oil and thus fuel that modern corporate farming behemoths use aplenty.

Increasing the debt limit for Chapter 12 bankruptcies may well be a good thing. Compared with the cost of Chapter 11 reorganization, the special bankruptcy provision for family [sic] farmers is less expensive.

Cheaper farm bankruptcies come at a price, however, and that price is lesser protection for farm lenders. No one feels much sympathy for lenders, of course, but Chapter 12 is structured in a way that the debt to such lenders man be written down to current land values thus leaving future appreciation, which will come eventually, in the hands of the farmer. Accomplishing such a result is not as simple as my brief description might suggest but its mere possibility effects bankruptcy negotiations between farmer and lender.

Last, even if Senator Grassley introduces a bill to increase the debt limits for Chapter 12, there's no guaranty it will simply pass as such. In other words, even an unobjectionable bill is an opportunity for logrolling. Stay tuned to see what gets larded onto what should be a straightforward change.

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