This post is written by Associate Editor Amy Robinson. Opinions and views expressed herein are those of the writer alone.
During the 1980s the American farming community was under much financial duress as interest rates skyrocketed and farm operations which had formerly been profitable were driven out of business. Variable and adjustable interest rates to farmers were heavily blamed for the disarray that took place in American agriculture during this time period. Farmers watched as their cost of production would literally triple overnight due to the increased cost of capital funding because of interest rate volatility. This paved the way for commercial banks to more foreclosures and acquisition of assets than possibly ever before.
One avenue of relief for farmers affected by this financial crisis was to consider a Chapter 12 bankruptcy filing. Chapter 12 of the Federal Bankruptcy Code is specific to “family farmers” and “family fishermen.” In order to qualify for this type of relief, a family farm must: (1) be engaged in a farming operation (2) have total debts of his or her operation not exceeding $4,153,150; (3) at least 50% of the total debts that are fixed in amount must be related to the farming operation; and finally, (4) more than 50% of the gross household income for the preceding year must come from the farming operation. In addition to these requirements, a corporate farm must meet other caveats to qualify, including being a privately-held corporation without publicly traded stock. The upside to filing Chapter 12 as opposed to Chapters 11 or 13 is its specific tailoring to farming operations. By comparison, Chapter 11 is much more geared towards large, corporate businesses, while Chapter 13 is friendlier to smaller, wage earner reorganizations.
Filing bankruptcy under Chapter 12 during the farm crisis could have been key for leveling out the agricultural economy during that time period. However, although many farm families were open and willing to the thought of Chapter 12 and liquidation, often times they were unable to go down this path. Farmers who liquidated assets by selling would be subject to huge tax ramifications via the federal income tax and the capital gains tax. Even in Chapter 12 bankruptcy the tax bills would still inevitably be passed on to the already distressed farming operation. Both farmers and their lenders were in a bind with very limited options. Even if the lender foreclosed on the property (e.g., by acquiring real estate, equipment, etc.) the farmer-owner would still be subjected to the tax burden. There seemed to be no good solution. Many agriculture economists would subsequently argue that the government’s lack of stepping in could be a factor to how long and drawn out the 1980s crisis really was. If there had been some viable solution for farmers during that time-period, things may have been drastically different for the economic recovery time.
Fortunately in 2005 Congress recognized this issue and amended Chapter 12 procedures in an attempt to remedy the tax problem. The amendment allowed an eligible farmer under Chapter 12 to liquidate assets and discharge the tax liability as an “unsecured claim” under the plan. This means that when a farmer sells real estate or equipment while under Chapter 12 bankruptcy, the income and capital gains tax debt can be considered the same as unsecured debt that is outstanding. Because of this important addition, the unsecured debt was able to be discharged the same as any other unsecured debt. This was a major victory for farmers who were trying to find relief via Chapter 12 bankruptcy. However, the courts have since interpreted the statute in many different ways which have been inconsistent from circuit to circuit. Some of these judicial holdings have been farmer friendly, while others have been more IRS friendly.
In 2012, the United States Supreme Court found more on the IRS friendly side in Hall v. United States. The issue in this case was whether the income and capital gains taxes incurred during the bankruptcy (through sale of assets) would be dischargeable debt, or if the statute only applied to income and capital gains taxes which occurred as the result of sales before the bankruptcy was filed. Ultimately the court held that a farmer may not discharge the tax liability if it was incurred during the bankruptcy. This put farmers in distress essentially back to 1980s era policy surrounding liquidation, which as previously stated, there existed very few options for relief.
Since the Hall decision, Congress has put forth a substantial effort to legislatively address the problem once again. In October 2017 Congress passed, and President Trump signed into law, the Family Famer Bankruptcy Clarification Act of 2017 (“Act”). The Act was truly a bipartisan effort to eliminate the ambiguity from the former statute and implement new legislation which would solve the issue once and for all. The Act eliminated enforcement of the former 2005 amendment to the Code (§ 1222(a)(2)(A)) and implemented a new section for clarification. The new § 1237 allows a farmer to be discharged of the tax liability even if the liability is incurred through sale of assets during the bankruptcy. This legislation essentially vacates the decision in Hall, and it removes the requirement that tax liability is only dischargeable if the debt is incurred prior to filing Chapter 12 bankruptcy by removing priority status of the tax debt.
Although the U.S. agriculture economy is not exactly the same presently as it was during the 1980s, farmers are still in a very tough environment today to make ends meet. Interest rates have remained fairly stable, but agricultural commodity prices are down, while input costs are still at an all-time high. These market conditions could be the recipe for an agricultural disaster or a repeat of the 1980s. Congress’ proactive approach and passage of the Act in 2017 was certainly a step in the right direction for both agricultural debtors and creditors when facing adversity. This tax relief will serve as an important resource in a farmer’s toolbox should the farmer find himself or herself in a situation where Chapter 12 bankruptcy is a viable solution.
 11 U.S.C. §§ 101(18), 101(19A), 109(f) (2016).
 Administrative Office of the Courts, Chapter 12 – Bankruptcy Basics (2017), available at http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-12-bankruptcy-basics.
 Ann Shaw, Michael Crowson, Farmers Only (and Fishermen, Too), 50-OCT Md. B.J. 64, 67-68 (2017).
 Brett Morrison, Spoiling a Fresh Start: In Re Dawes and a Family Farmer’s Ability to Reorganize Under Chapter 12 of the U.S. Bankruptcy Code, 53 B.C. L. Rev. E-Supplement 89, 92 (2012).
 11 U.S.C. § 1222(a)(2)(A).
 See Morrison, at 94-95 (discussing the disagreement among the Federal Circuit Courts).
 Hall v. United States, 132 S.Ct. 1882 (2012).
 Family Farmer Bankruptcy Clarification Act of 2017, 11 U.S.C. § 1237 (2017).