Farmprogress

Bankruptcy. The word is often too heavy to lift to our thoughts, let alone our lips.

For farmers, thoughts of bankruptcy are fraught with the fear of losing land and livelihood. So, it’s important to know that the farm can be saved through this process.

Chapter 12 of the Bankruptcy Code offers specialized solutions designed to help family farms retain their agricultural assets while managing debt repayment — all while continuing to farm.

“It is like taking a trip from where you are now, through Chapter 12, to the end,” says Russell D. Morgan, a certified ag consultant serving Tennessee and Kentucky.

When navigating this trip through Chapter 12, Morgan offers four steps for farmers and attorneys to follow to save the farm:

Decide if Chapter 12 is necessary

In filing for Chapter 12, a farmer’s first step is to hire an attorney experienced in this specific bankruptcy code, because it differs from more common filings like chapters 7, 11 or 13.

The attorney should then assess the financial situation of the farming operation, because other options may be available to regain financial footing.

“In a few situations, farmers may not have exhausted all their non-Chapter 12 opportunities,” Morgan says. “Maybe they can work with lenders to restructure debt without going through the cost of bankruptcy, which would save money and a lot of headache.”

Conduct a holistic financial analysis

If Chapter 12 is unavoidable, the next step is to thoroughly analyze the financial situation. This includes all current assets and liabilities, along with historical performance indicators.

The attorney or an agricultural consultant helps compile these records, and a comprehensive balance sheet is required for a complete financial analysis, listing all assets and debts.

For the most accurate balance sheet, Morgan highly recommends seeking expert advice to determine the value of assets. Then categorize those assets as short, intermediate or long term.

“Find professionals who can provide valuable information,” Morgan says. “They will be more objective in the assessment. Maybe a tractor dealer can come out and give a good estimate of what the equipment is worth — same thing with the land. You want to be as accurate as possible.”

Debts should be listed with current contracted terms to include interest rates, payment schedules and loan end dates. Then pair the assets with the debts.

“Line them up. Pair liabilities with liens and mortgages. That is important to create your plan and projection,” Morgan says.

Analyze and forecast the next three production years

To assist a farmer through Chapter 12, Morgan prefers to look at a three-year production forecast based on historical cropping patterns. Sources for production records depend on the type — row crop, poultry or livestock — and some are more easily attainable than others.

For row crops, Morgan recommends gathering historical cropping information from the Farm Service Agency, or most ideally, from crop insurance records.

Factors to consider in the financial plan are the rate of return, reasonable expectations of income, and payments that can be made on all debts, based on historical data.

Morgan cautions to be mindful of the professionals you choose. While certified public accountants are knowledgeable on tax preparation, they may not have a business management mindset in terms of production.

Of all the historical information, Morgan advises against using previous tax returns. Under Chapter 12, “those are worthless,” he says. “What you want instead is an accrual-adjusted income statement.”

In the forecast, changes are likely to be made to the farming operation, and sometimes it’s a hard pill to swallow.

“I have to explain that what’s been done in the past has brought us to a place of unsuccess, so we cannot expect to continue to operate in the same size or crops, and be successful in the future,” Morgan says.

Monitor the Chapter 12 process all the way to discharge

Once a Chapter 12 bankruptcy filing has been confirmed by the court, monitor its progress. Morgan says internal monitoring helps prepare farmers for the required court-
ordered reports, which differ by state or region.

Modifications to the plan may be necessary if things are not moving toward the projected course. “You are better to head that off and modify the plan than to realize later that the farmer cannot make their payments,” Morgan says.

Plus, if there are any changes planned within in the three-year forecast, such as partial liquidation or an enterprise change, monitoring presents an opportunity to determine the long-term feasibility of those adjustments.

Discharge is the final phase of Chapter 12, when all debts of the repayment plan are paid. However, the work does not stop there. Morgan says continued financial management is critical.

“The need for elevated financial risk management does not diminish once Chapter 12 has ended,” he says. “In fact, that is just as important as the exit strategy. Continue with a farm management adviser or consultant, so they can provide economic analytics, metrics and benchmarking.”

Who qualifies for Chapter 12?

The Chapter 12 of the Bankruptcy Code goes back to the 1980s, when farmers were facing historical financial distress and finding limited success with chapters 11 and 13. It was created as part of the Family Farmer Bankruptcy Act of 1986 and was made a permanent part of the Bankruptcy Code in 2005.

“Many farmers do not know that Chapter 12 bankruptcy exists, and many attorneys are unaware of the potential for Chapter 12 reorganization,” says Renee S. Williams, Chapter 12 standing trustee for the eastern and western districts of Arkansas.

By filing a Chapter 12 bankruptcy, farmers can restructure debts, keep assets and work with creditors on a repayment.

“Many assume that a farm bankruptcy case means the end of the farm — rather than the useful tools to preserve farm assets and farming operations,” Williams says.

Chapter 12 does have specific eligibility requirements. The debtor must be a family farmer or family fisherman engaged in farming with a regular income at the time of the filing. The farming aspect can be row crops, cattle, timber or any other agricultural production.

Individuals and corporations can file for Chapter 12, though each has different requirements. Williams says she is seeing cases where a Chapter 12 bankruptcy is filed for not just the individual but also the farm’s limited liability company.

Individuals and spouses. They qualify if:

Aggregate debts are less than $12,562,250.

At least 50% of the debt, excluding the residence, arises from the family farm operation.

Over 50% of the gross income comes from the operation in the two taxable years preceding filing.

Fishing operations. Family fisherman and spouses qualify if:

Aggregate debts are less than $2,268,550.

At least 50% of the debt, excluding the residence, arises from a commercial fishing operation.

Over 50% of the gross income comes from the operation in the one taxable year preceding filing.

Farming corporations or partnerships. With no income requirements, they qualify if:

Aggregate debts are less than $12,562,250.

More than 50% of the stock is held by one family or relatives.

More than 80% of the asset value is related to the farming operation.

Bankruptcies on the rise

Since 2023, Chapter 12 bankruptcies have increased, marking an end to a four-year downward trend in such bankruptcies. Here are statistics so far:

Compared to 2023, the number of Chapter 12 filings increased by 55% in 2024.

Early data in 2025 indicates the upward trend will persist.