Q: What is Chapter 12 of the federal bankruptcy code?
A: This section of federal bankruptcy law applies specifically to the nation’s food producers – farmers, fisherman and ranchers – whose occupation and prosperity is dependent on the whims of Mother Nature. Chapter 12 is designed to help family farmers who fall on hard times to restructure their debts and continue earning an income stream to stay afloat during bankruptcy proceedings. It recognizes the unique capital-intensive arrangements of a farming operation. Many farm families understand what it means to be “cash-poor and asset-rich.” It requires savvy risk management tools and good lines of credit to stay in business. It also makes it much harder to reorganize debts in tough times. Chapter 12 recognizes the unique situation when family farmers find themselves on the financial brink and helps farm families avoid losing their livelihoods to pay off creditors. It works by creating a repayment cushion to allow farmers to continue payments under a restructuring plan within a three- to five-year window. During the farm crisis in the 1980s, I was the original sponsor of Chapter 12 to provide a critical safety net to help family farmers survive the harsh downturn in the farm economy. It remained a temporary provision of law from 1986 until 2005, when I fought successfully to make Chapter 12 a permanent fixture in the nation’s bankruptcy code. As one of the only family farmers in the U.S. Senate, I understand how agriculture, tax, trade and energy policies affect a farmer’s bottom line. Before the reforms in 2005, a farmer who sold land under Chapter 12 to reorganize debts and repay creditors would be slammed by crushing capital gains taxes. My 2005 amendments gave a reality check to the IRS and bankruptcy courts. For example, farmers entering Chapter 12 would sell land that likely had been in the family for a very long time. Selling this land decades after the original purchase could result in significant capital gains tax liability. My amendment was adopted to prevent the IRS from effectively vetoing a restructuring plan that would force family farmers to sell off the rest of their assets and quit farming for good.
Q: What prompted you to press for new reforms to Chapter 12?
A: A 5-4 U.S. Supreme Court ruling in 2012, Hall v. United States, upset the apple cart. Ignoring congressional intent, the high court interpreted the law to apply to land sold only in the tax year prior to filing for bankruptcy protection, not during the year of the bankruptcy filing. My bipartisan Family Farmer Clarification Act rectifies this issue once and for all. My bill makes clear that capital gains taxes assessed to farm land that is sold to pay off creditors in bankruptcy proceedings should be treated as an unsecured liability. In other words, the IRS cannot cut in line ahead of the local bank or local seed or feed store. This will help family farmers who are in financial straits to stay afloat during reorganization and not lose their livelihoods just to pay the IRS. It gives family farmers a chance to get back on good financial footing and gives creditors a better chance at repayment. This was my fourth bite at the apple since 2012 and I’m pleased bipartisanship has prevailed. The President in October signed my bill into law. As family farmers haul in the fall harvest that will feed and fuel the world, they can breathe a sigh of relief when the last load of grain hits the bin and have peace of mind that I have their backs at the policymaking tables, from bankruptcy to renewable fuels, taxes, trade and the next Farm Bill coming up in 2018.
U.S. Senator Chuck Grassley serves on the Senate Finance, Agriculture and Judiciary Committees which have broad jurisdiction over policy matters affecting family farmers. A lifelong family farmer, Senator Grassley farms with his son and grandson in Butler County.
