Farm bankruptcy filings are on the rise nationally, a trend that appears to be on the rise also within Indiana’s farming community. Farm bankruptcy cases come in different forms such as Chapter 7, Chapter 12, or even Chapter 11 filings depending on the size, needs, and complexity of the bankruptcy case. This trend is startling if you compare it to the general decline of bankruptcy that has been occurring for the last 8 years.
Most large modern farms use substantial operating loans in order to purchase planting seed and acquire necessary pieces of farming equipment. This disturbing trend of “farm operation” loans has greatly increased over the years. If these loans are over-extended, they create a very dangerous situation for Indiana farmers. Payments for these large “farm loans” are many times due to a single time of the year: at harvest. Other farm loans such as for livestock farms are usually paid monthly or in other cyclical periods. If the farmer experiences a bad year or unexpected low grain prices, these farm loans sometimes go into default. This can cause the bank to threaten the liquidation of the farm assets. If a modification of the loan is offered by the bank instead, it usually just “kicks the can down the road.” The farmer eventually defaults on his obligations.
As stated above, grain prices can sometimes have a devastating effect on farmers who annually pay farm-operation loans. If the grain prices are not as high as expected, this can create the inability of the farmer to pay his cash-rent to landowners and his farm-operating loan payment. Over time, these farm loans grow larger. They grow until they simply cannot be serviced. Even the smallest downturn causes the borrower to default and be forced into bankruptcy.
The demand for farm products of all kind can greatly change due to national and international markets. This demand usually determines the price achievable in the market for any farm product. Tariffs and trade war problems, such as the ones coming from the battles of the current administration, can have a powerful effect on domestic farm-product pricing. In addition, farm product demands are constantly changing from internal movements and trends in the farming industry. Low prices can quickly cause a farmer to come up impossibly short: the farm operation is forced then to file for bankruptcy.
Chapter 12 is a special form of bankruptcy that only “farmers or family fisherman” are able to file in the bankruptcy code. This type of bankruptcy is specially-tailored to farmers. This type of bankruptcy retains the more cost-effective and personal traits of Chapter 13 while opening up some of the flexibility and other features of Chapter 11. Chapter 12 is unique and requires a knowledgable attorney.
More common for farm bankruptcy many times are Chapter 7 and Chapter 11. Chapter 7 is filed when the debtor is able to get an advantage by filing a “full liquidation” bankruptcy. The farmer may even be able to continue farm operation in Chapter 7 if the land farmed is either cash-rented or encumbered by large mortgage loans. Other times, however, continued operation may not be available in Chapter 7.
Chapter 11 is sometimes filed by large farming operations who need the full protections of reorganization bankruptcy. Corporation-owned farms are also sometimes unable to file under Chapter 12 because of the eligibility requirements.