Congress Expands Eligibility for Family Farmers Seeking Bankruptcy Protection
On August 23, 2019, the Family Farmer Relief Act of 2019 (the FFRA) was enacted, becoming the first major revision since the 1990s to the eligibility requirements for family farmers seeking protection under Chapter 12 of the Bankruptcy Code, which is a hybrid of Chapters 11 and 13 providing specialized (and debtor-friendly) rules and procedures available to qualifying family farmers and family fishermen with regular income.
Both individuals and corporate entities may be eligible for relief under Chapter 12. Both before and after the FFRA’s enactment, U. S. Code, Title 11, Section 101(18), governs who may be a debtor for purposes of Chapter 12 by defining a “family farmer.” Under that section, individual debtors can qualify as a family farmer by demonstrating:
- that they derive more than 50% of their gross income from a farming operation for either the taxable year preceding the filing, or each of the second and third taxable years preceding the filing; and
- not less than 50% of their aggregate, noncontingent, liquidated debts arise out of the farming operation.
Similarly, a corporation or partnership conducting a farming operation could qualify for protection under Chapter 12 by demonstrating:
- that more than 50% of the outstanding stock or equity was held by one family and the relatives of the members of the family and that more than 80% of the value of the entity’s assets consisted of assets relating to the farming operation; and
- not less than 50% of the entity’s aggregate, noncontingent, liquidated debts arise out of the farming operation.
Importantly, and regardless of whether the debtor is an individual, a corporation or a partnership, 11 U.S.C. 101(18) places an express limit on the amount of aggregate debt that a debtor may have to qualify for protection under Chapter 12. Prior to the FFRA, the aggregate debt limit for both individual and corporate debtors was capped at $4,411,400.00 (albeit indexed for inflation on a triennial basis). Family farmers with debts in excess of the cap were generally limited to seeking relief under Chapter 11 of the Bankruptcy Code.
In recognition of the significant changes to farming operations since Chapter 12’s enactment in 1986, particularly with respect to the increasing cost of equipment and consolidation of farming operations, Congress sough to expand eligibility for qualifying family farmers. Hence, the FFRA raised the aggregate debt limit in 11 U.S.C. 101(18) from $4,411,400 to $10,000,000. From the debtor perspective, the FFRA is likely to significantly expand the number of farming operations eligible for treatment under Chapter 12. Lenders should be aware that a greater percentage of their existing loan portfolios could be subject to restructuring under rules more favorable to their borrowers than might otherwise be the case in a traditional Chapter 11.
Disclaimer: The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.