Chapter 12 Debt Limit on the Big Show
Joseph Peiffer chats with Doug Cooper about Chapter 12 and raising its debt limit on the Big Show
The audio from this conversation is below, as well as the transcript.
Doug Cooper:
I have been spending some time with Joe Peiffer. He is a bankruptcy lawyer with Ag & Business Legal Strategies, and he has been talking about the need to extend the debt limit in Chapter 12 bankruptcy. Joe, give us an update.
Joe Peiffer:
Yesterday the Senate passed H.R.2336, the Family Farmer Relief Act of 2019. That act increases the debt limit for Chapter 12 to $10 million.* It’ll be effective when President Trump signs the bill. It passed the house a week ago Thursday. It passed the Senate yesterday. The process of getting it passed has been a bit tortured, as most things are in Washington these days. Because we have divided Congress and there’s a lot of polarization, it’s been difficult to get anything through. Farm Bill made it to the Senate this past Monday, and lots of people contacted their senators, said we support this Family Farmer Relief Act, which would increased the debt limit, and they also asked their senators to contact Senator Durbin and tell him to remove his hold.
Joe Peiffer:
As of Wednesday, the status was that Durbin had released his holds on three bills that had been initiated by Democrats in the house. The only one he hadn’t released it on was a small business reorganization act. That was the only bill that was started by a Republican in the House. The Senate Republicans, since they’re in the majority said, “No, we’re not going to let you have three bills started by Democrats in the House if we don’t get something back in return.” The package went through late yesterday afternoon, about three o’clock is when I got the call that it had just passed the Senate. Senator Durbin removed his hold on the Small Business Bankruptcy Reorganization Act. Then it, along with the Family Farmer Relief Act, the Haven Act, and the National Guard and Reservist Debt Relief Extension Act all passed basically the same time. Now all four of those bills will head to the President. The Family Farmer Relief Act will be effective when President Trump signs it. The expectation is high that the President will sign all four of these bills.
Doug Cooper:
Joe, I realize that there are some farmers out there that are possibly facing bankruptcy. Will this encourage them to move forward now that Chapter 12 debt limit has moved from $4-plus million to $10 million?
Joe Peiffer:
The current debt limit’s $4.4 million, and the new one will be $10 million. Will it encourage more? I don’t think it’s going to encourage, but it will allow. And when I say that, I have never found a client coming in saying, “I really want to file bankruptcy.” They come in to me, and the reality of the situation is they’ll file if there’s no better alternative. In many instances, they’ve done many things trying to stave off bankruptcy. They have taken the money out of their retirement plans, they’ve borrowed on everything they’ve got, they’ve sold a lot of things they perhaps shouldn’t have sold trying to stay out of bankruptcy, because nobody likes the thought of the taint of bankruptcy. They’d rather not file bankruptcy, because that to them is an admission of failure. “I couldn’t make my business run.” I doubt it will encourage more, but it will allow them another tool if they need it.
Joe Peiffer:
The other thing it will do, as was set out in a 1993 study by Dr. Harlan, Iowa State, was that the availability of Chapter 12 allowed banks and farmers to negotiate against the backdrop of some certainty as to what would probably happen if a bankruptcy were filed. And in many instances, with the backdrop of how the case would come out if a bankruptcy were filed, they were able to make a deal that didn’t require bankruptcy, and it helped a great deal doing that.
Doug Cooper:
Let me ask that a little bit differently, Joe. Does this give farmers more leverage with their financial institutions?
Joe Peiffer:
If they were over the current $4.4 million limit, yes, it will give them some more leverage, because reorganization within a Chapter 11 for a farmer is virtually impossible. That’s why Chapter 12 was set up in 1986. So by increasing the debt limit to $10 million, we now have many more farmers that can use the power of Chapter 12 to restructure their indebtedness within bankruptcy. And if they need to, they can also, if they have to liquidate assets, within Chapter 12, there is an extremely powerful tax provision that allows that tax to be treated as an unsecured claim. This is what makes Chapter 12 the most powerful chapter of bankruptcy in the bankruptcy code.
Doug Cooper:
Joe, are your phone’s still ringing? Are farmers calling in and at least asking questions, trying to figure out what direction they should go in dealing with their financial institutions?
Joe Peiffer:
We have a lot of questions about people saying, “What can we do?” Candidly, I’m hopeful that people will consider their options earlier rather than later. The farmer should be proactive and looking for alternatives before the banker says, “I won’t loan you another dime.” If the farmer says, “I’ve been losing money, and Mr. Banker here’s what I plan to do to try to change things, and let’s change the structuring of our debt,” that will be welcomed by the banker, because you’re now addressing the situation. If you’re not addressing the situation, and you assume that everything’s going to be the same, and you can always assume the bank will loan you money, that’s a bad assumption. It’s far better that the farmer take it head on, get the help he needs management-wise so that they can move forward and hopefully negotiate out without the need for a bankruptcy.
Doug Cooper:
Joe, I think it bears repeating, your best advice is act sooner rather than later.
Joe Peiffer:
Absolutely, sooner rather than later. And as Roger McEowen said a while back, “Listen to your wife.” If your wife’s the one doing the books, and she sees there’re problems, listen to her and don’t just assume everything will be okay. Be proactive and move forward to avoid the worst of the worst situations that can happen if it’s ignored.
*As of April 1, 2022, the chapter 12 bankruptcy debt limit has increased to $11,097,350.
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Categories: Chapter 12, In the Media, Legislation, Politics
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