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The Chapter 12 Experience in the U.S.: Regional Comparisons and Analysis of Filing, Discharge, and Failure Rates Bruce L. Dixon, Edward M. Flynn, and Janet A. Flaccus Bruce L. Dixon is a professor of agricultural economics and economics, University of Arkansas at Fayetteville, and a principal of the Center for Farm and Rural Business Finance, which is jointly sponsored by the University of Illinois and the University of Arkansas. Edward M. Flynn is a management analyst in the Bankruptcy Judges Division of the Administrative Office of the U.S. Courts in Washington, DC, and Janet A. Flaccus is a professor of law at the University of Arkansas at Fayetteville. The assistance of Chuan Li and Leisha Vance is gratefully acknowledged, as well as the helpful comments of two anonymous reviewers. The views expressed in this article are those of the authors and do not necessarily reflect the views of the Administrative Office of the U.S. Courts. Abstract <top> Filing and case disposition data for the 16,744 Chapter 12 petitions filed in the United States from the inception of Chapter 12 in November 1986 through December 1994 are analyzed. Ten regions are defined. Substantial regional and time differences are identified for proportions of farms filing Chapter 12 and how Chapter 12 cases are terminated. Results show that the proportion of farms filing for Chapter 12 has been relatively stable since 1989. Estimates indicate farmers still frequently use other bankruptcy chapters. Moreover, it appears a smaller proportion of recent Chapter 12 filings will be successful than in the past. Key words: Chapter 12, bankruptcy, national data, filing and disposition rates. Article <top> The Bankruptcy Reform Act of 1994, signed by President Clinton on October 22, 1994, established a bankruptcy commission to report in approximately two years on whether major changes should be made to the Bankruptcy Code. The last time such a commission was empaneled was in the early 1970s. The report of that commission eventually resulted in an entirely new Bankruptcy Code which was radically different from the previous bankruptcy law that had been in place for nearly a century. Chapter 12, the section of bankruptcy law devoted to family farmers, will no doubt come under scrutiny by the current bankruptcy commission. It has never permanently been placed into the Code. Twice now, Congress has passed Chapter 12 legislation. Both bills had "sunset" provisions, meaning that the law would die unless Congress passed new legislation. Chapter 12 is now due to sunset in October 1998. Thus, it is likely the commission will consider arguments about the success or failure of this aspect of agricultural policy. It is especially important that the commission, and those advocating for or against special bankruptcy assistance for farmers, have all of the information necessary to effectively evaluate Chapter 12's impact. This article seeks to fill part of that need. Chapter 12 was a direct result of concern for farmers during the farm debt crisis of the mid-1980s. In general, the existing forms of debt relief prior to the enactment of Chapter 12 were not well suited to family farms (Harl 1992). As discussed in Harl (1990, 1992) and in Peoples, Freshwater, Hanson, Prentice, and Thor, a substantial number of farmers who had large debt loads were caught in a financial squeeze by declining exports, rising interest rates, and declining asset values. In order to remain in farming, debt-ridden farmers needed to be able to restructure debt. Enactment of Chapter 12 allowed farmers seeking its protection to write down debt to the fair market value of the collateral (Harl 1990). In the years following the enactment of Chapter 12, a number of studies were undertaken on a state-by-state basis to examine individual case files of Chapter 12 petitioners.1 Such analyses involved examination of a number of case files to obtain basic demographic and financial data from the forms filed by petitioners. From these analyses, facts concerning farm size, levels of debts, debt/asset ratios, and conditions of the financial reorganization typically were described. In some studies, types of creditors and the extent of debt reduction under confirmed plans were enumerated and quantified. Faiferlick and Harl went a step further and also interviewed petitioners' attorneys to assess the impact Chapter 12 was having on borrower-lender relations in Iowa. Much of this literature and important results are succinctly summarized and discussed in Harl (1992). 1For Iowa, see Faiferlick and Harl; for South Dakota, see Janssen, Peterson, and Pflueger; for New York, see Barnes and Brake; for Indiana, see Barnard, Harrison, Lamie, and Yamazaki; for California, see Innes, Keller, and Carman; and for Arkansas, see Flaccus and Dixon. Very few analyses have been performed at the national and regional levels that examine the aggregate use of Chapter 12 and the success rate of those filing Chapter 12 cases. Several important questions need to be addressed. To what extent has Chapter 12 been utilized by farmers in the U.S., and how has the intensity of Chapter 12 use varied across the nation and time? Is Chapter 12 the preferred form of bankruptcy, or do farmers prefer other chapters? What proportion of those farmers filing for Chapter 12 are successful in completing the plan and thereby receive a discharge of all remaining unpaid unsecured debt? What has happened to those cases closed without receiving such a discharge? The discussion that follows examines these questions using data from all 50 states. Answers to the above questions will provide legislators and various advocates with information on how well Chapter 12 has served its intended purpose. Such information is also useful in determining how debt relief for agriculture may be configured in the future as agriculture evolves. Finally, farmers and their counsel will benefit by knowing the relative odds of success in Chapter 12 and, armed with such information, may more precisely choose a course of action during times of financial peril. Total Filings by Year and Agricultural Region <top> Data concerning Chapter 12 filings are compiled by the Administrative Office of the U.S. Courts. These data are aggregated in this study by farm production regions typically used in U.S. Department of Agriculture (USDA) reports.2 There are 10 such regions comprising the 48 continental states. The 10 regions are depicted in Figure 1. 2The data are also available at more disaggregated levels. The District of Columbia, Hawaii, and Alaska had zero, three, and nine case filings, respectively, from Chapter 12's inception in November 1986 through December 31, 1993.
Table 1 displays the number of filings in each region on an annual basis. Since Chapter 12's beginning in November 1986, a total of 16,744 Chapter 12 petitions were filed through December 31, 1994. It is clear from Table 1 that the Northern Plains and Corn Belt regions are the leaders in absolute number of cases filed in every calendar year. This is not surprising for the Corn Belt, since it has the largest number of farms (as farms are defined and reported by the USDA in its Agricultural Statistics).3 However, the Northern Plains had a much higher than proportionate number of filings, which suggests looking at filing numbers relative to farm numbers. 3In the Agricultural Statistics, a farm is defined as "an establishment that as of June 1 sold or would normally have sold $1,000 or more of agricultural products during the year" (USDA 1993, p. 346).
Source: Administrative Office of the U.S. Courts. *U.S. numbers also include Puerto Rico, Alaska, and Hawaii. Figure 2. Chapter 12 Filing Rates by Region, Panels A & B
Each figure in Table 1 was divided by the number of farms in that region, as defined in the Agricultural Statistics, to obtain the statistics in Table 2. That table presents the number of Chapter 12 filings per 10,000 farms in each region in each year. Given the broad definition of farms, it should be borne in mind that many farms did not qualify for Chapter 12, as discussed below. The data in Table 2 are graphed in Figure 2 (Panels A and B). Three key observations can be made from the Table 2 data. The most striking observation is that 1987 (the first full year Chapter 12 was available) displayed by far the greatest amount of activity on a per farm basis. This probably reflects, in part, a pent-up demand for Chapter 12 due to the agricultural debt crisis of the mid-1980s. Some farmers were likely holding on until the passage of Chapter 12 to avoid filing under other bankruptcy chapters. In addition, the Agricultural Credit Act of 1987, enacted on January 6, 1988, put a temporary moratorium on foreclosing loans by the Farmers Home Administration (FmHA) and required consideration of principal and interest write-downs on debt restructuring for both FmHA and the Farm Credit System.4 As observed by Harl (1990), these provisions "are expected to produce Chapter 12-like results without the cost and paperwork of bankruptcy filing" (p. 144). Thus, it is not surprising that the flow of Chapter 12 filings abated markedly in the years after 1987. In addition, the overall agricultural economy started to improve from 1987 forward (Peoples et al.). 4Regulations to carry out the write-down of debt were issued by the Secretary of Agriculture in October 1988 (7 C.F.R. § 1951.902(1988)), which was required before the moratorium on foreclosures could be removed.
Sources: Administrative Office of the U.S. Courts; Agricultural Statistics (various issues); and National Agricultural Statistics Service (private communication, farm numbers for 1992, 1993, and 1994). *U.S. numbers do not include Puerto Rico.
The second major implication of the Table 2 data is that the Northeast and Appalachian regions of the U.S. had comparatively much less activity than the remaining regions. This lack of activity in the Northeast and Appalachia is not surprising, since it was the central part of the U.S. that experienced the greatest farm financial stress in the mid-1980s (Hanson, Parandvash, and Ryan). Also, 1987 Census of Agriculture data show 65.8% of Appalachian farms had annual sales less than $10,000 (U.S. Department of Commerce), and access to Chapter 12 requires that at least 50% of gross income must come from farming. Thus, many Appalachian farms likely would not be eligible for Chapter 12—although this "small-farm" effect is not evident in the Delta, Southern Plains, and Southeast, which also have relatively high proportions of small farms. Finally, the Table 2 data indicate that after the first 25 months of Chapter 12, the U.S. as a whole had a rate essentially between six and eight farms per 10,000 for the ensuing five years (although there is considerable regional variation around these figures). In 1994, the annual filing rate dropped to its lowest value ever, 4.37 per 10,000 farms. There is a distinct pattern of seasonality to the filing of Chapter 12 petitions. Figure 3 displays the mean number of filings per month over the 72-month span from October 1988 through September 1994. There is high filing activity in the spring, particularly March and April, with a trough in the summer and fall. The spring peak may reflect the fact that farmers perform financial analysis in the spring as income taxes are prepared. Alternatively, the pattern may also reflect the inability of some farmers to obtain further credit in the form of operating loans and they are then forced into bankruptcy proceedings. The summer trough may suggest a tendency by some lenders to extend additional credit to marginal borrowers to prevent loss of already planted crops. Utilization of Chapter 12 Compared with Other Bankruptcy Chapters <top> Chapter 12 is not available to all farmers. It is limited to "family farmers" as they are defined in the Bankruptcy Code. In addition to the requirement that 50% of gross income be derived from farming, there are limits on the level of debt outstanding, and requirements of family ownership that limit access to Chapter 12 (as described in Flaccus). Even for family farmers eligible to file in Chapter 12, there are good reasons to use bankruptcy chapters other than Chapter 12. A frequent alternative is Chapter 7, complete liquidation, in which a farmer usually gives up nonexempt assets and may have to give up encumbered exempt assets as well. One reason for using Chapter 7 from the beginning is that the various required fees paid when using Chapter 12 (attorney's fees, trustee's fees, and filing fees) are generally lower in Chapter 7. Chapter 7 is much quicker, and the farmer can start over in farming or some other enterprise with reduced debt. However, the farmer will have fewer if any assets.5 Another reason for preferring Chapter 7 to Chapter 12 is that the debtor may be able to avoid personal responsibility for income tax liabilities from liquidating assets, which is not available to Chapter 12 filers (as noted in Harl 1992). Also, the farm may be in such dire financial condition that a reorganization is not financially viable and there is really no other choice but to file under Chapter 7. 5Not all debt is discharged in Chapter 7. For example, nondischargeable claims include such debts as taxes and wages. Nor are all assets necessarily lost. If the farmer and secured lender can work out an agreement, then the asset can be kept. Unfortunately, there are no reliable national data on the number of farmers filing for bankruptcy under other chapters for the 1980s and 1990s. Specifically, it would be desirable to identify the number of farmers using Chapters 7, 11, 12, or 13, as farms are defined in the USDA's Agricultural Statistics, but such data do not exist.6 However, there are two data sources that can be analyzed to give some indication of the relative use of Chapter 12 by farmers as compared with the other chapters. Matthews, Kalaitzandonakes, and Monson provide a complete enumeration of all farms in Missouri filing for bankruptcy from 1981 through 1989. From 1981_85, 67% of the Missouri farm bankruptcies were Chapter 7, 29% were Chapter 11, and 4% were Chapter 13. In the first three full years of Chapter 12 (1987 through 1989), there were 853 farm bankruptcies filed; only 374 (44%) were Chapter 12 filings. Fifty percent of the 853 filings were Chapter 7, and the remaining 6% were Chapter 11 and Chapter 13 filings. This indicates that Chapter 12 was substituted for Chapter 11 to a large degree, and for Chapter 7 to a lesser degree. Moreover, for 1989, 60% of the Missouri bankruptcies were under Chapter 7 and only 34% were under Chapter 12. 6Chapter 7 is liquidation and Chapters 11, 12, and 13 are reorganizations. Chapter 11 is available to any firm or individual, without any debt limitations. Chapter 12 is for farming, with a debt limitation of $1.5 million. Chapter 13 is for consumer reorganization, with a limit on secured debts not to exceed $350,000 and unsecured debts not to exceed $100,000. These limits were increased to $750,000 and $250,000, respectively, in the Bankruptcy Reform Act of 1994. Annual bankruptcy rates for the U.S. are reported in Stam and Wallace, utilizing data from a survey of agricultural banks conducted by the American Bankers Association (ABA). These rates were derived by asking the surveyed bankers the percentage of farmers filing for bankruptcy—presumably without regard to chapter used—in each banker's lending area. It should be kept in mind that the bankers almost certainly do not define farms as broadly as the definition used in the Agricultural Statistics. That is, if the percentages reported by the bankers were applied to the number of farms given in the Agricultural Statistics, then the absolute number of farm bankruptcies would most likely far exceed the number actually filed. Table 3 reports the percentages of farmers filing for bankruptcy as estimated by the ABA survey and the percentages of farms filing under Chapter 12 for the U.S. The percentages of observed Chapter 12 filings are substantially lower than the bankruptcy percentages estimated by the bankers. This arises because the Chapter 12 rate is based on the definition of farm numbers given in the Agricultural Statistics and, as noted above, the bankers probably define farms much more narrowly. Assuming the bankers' proportions are reasonable and consistent estimates of overall farm bankruptcy filings, the ratio of the overall bankruptcy percentage estimated by the bankers to the Chapter 12 rate is a rough indicator of the use of Chapter 12 relative to other chapters. The national data clearly suggest that after 1987, a smaller proportion of farmers filing bankruptcy utilized Chapter 12.
Note: The ABA estimates denote the percentage of farmers filing for bankruptcy as estimated by agricultural bankers and reported in Stam and Wallace (except for the 1994 figure, which was provided in a personal communication from Jerome M. Stam). In the years 1987, 1988, 1989, and 1990, the ABA estimates go through June; for 1991, 1992, 1993, and 1994, the estimates are for the calendar year. The ABA estimates are not based on an explicit definition of total farm numbers, whereas the Chapter 12 definition explicitly defines farms as in the USDA's Agricultural Statistics. From Table 2, there is clearly a declining trend over time in the use of Chapter 12 from the 1987 levels. Thus, even though farmers experienced somewhat of an upturn in bankruptcy filing in 1993, they probably have used other chapters with greater frequency in the 1990s. Given that Chapter 11 is more cumbersome, expensive, and generally less debtor friendly, and that Chapter 13 had low debt-limit restrictions, we conclude that in the last few years farmers most likely have been utilizing Chapter 7 in greater proportion. As the data from Missouri (Matthews et al.) demonstrate, the chapter of choice there, when Chapter 12 was not selected, was Chapter 7. This conclusion is further buttressed by the fact that when farmers in Chapter 12 converted to another chapter before receiving a Chapter 12 discharge, Chapter 7 was overwhelmingly the chapter of choice. This is discussed in more detail in the next section. One reason for the declining utilization of Chapter 12 relative to other chapters is that the enactment of Chapter 12 probably changed the negotiating relationship between farmers and lenders. With the passage of time, farmers in marginal financial distress and lenders recognize that going through a formal Chapter 12 filing, being confirmed, and receiving a discharge are costly to both debtor and creditor. Both parties may end up better off by negotiating outside the formal Chapter 12 process. Thus, those farms that are likely to be successful in being confirmed and subsequently receiving a discharge can effect a better result without going through the formal Chapter 12 process. This possibility and evidence supporting its prevalence in Iowa are discussed more fully in Faiferlick and Harl. Their study shows that 50% of attorneys representing filers believed that Chapter 12 exerted some influence on the creditor-debtor negotiations. This suggests Chapter 12's existence benefits some financially stressed farmers who do not actually file under Chapter 12. A second reason for the decline in the use of Chapter 12 may be federal statutory changes. For the first time, as the result of the Agricultural Credit Act of 1987, FmHA and the Farm Credit System were given the obligation to consider writing down indebtedness. This change may have lessened Chapter 12 use. The Missouri data suggest an increased preference for Chapter 7 over Chapter 12 in 1989. The Agricultural Credit Act was passed in January of 1988. The regulations that were to be issued to implement the debt reduction program authorized by the statute were not promulgated by the FmHA until October 1988,7 and there was an additional span of time needed to implement the regulations at the local level. 7See C.F.R. § 1951.902, (1988).
Disposition of Filed Cases <top> Farmers are motivated to file Chapter 12 to save the farm and discharge debt. One filing benefit is that from the filing date until the final plan payment, or dismissal of the case, there is a stay on collection by pre-petition creditors. Alternatively, the act of filing might be used to apply pressure in negotiations with creditors. Also, there is certainly no guarantee that a farmer's plan will be approved by the court, since the court must be persuaded that the plan is viable. Since there are considerable costs that must be borne by the petitioner in filing a bankruptcy, it is of interest to examine the proportion of petitioners who eventually get discharged. Clearly a farmer who fails in Chapter 12 has potentially lost considerable time and money (see Harl 1992 for a discussion of costs involved in Chapter 12 in Iowa and Indiana). There are essentially five possible dispositions (terminations) of a Chapter 12 case. A case can be dismissed before confirmation (which means the court did not approve a plan), converted to another bankruptcy chapter before confirmation, dismissed after confirmation but before discharge, converted to another bankruptcy chapter after confirmation but before discharge, or discharged of remaining unsecured debt (successfully completed).8 A filed case can result in any of these outcomes. 8A Chapter 12 debtor does not receive a discharge until all plan payments have been made. Analysis of U.S. Data <top> Table 4 shows a summary of the disposition of cases as of September 2, 1994, by year of filing. Of the 15,844 cases filed from the inception of Chapter 12 through 1993, 4,543 were still open as of September 2, 1994. Of the 11,301 terminated cases, 42.6% achieved a discharge. The remaining 57.4% of terminated cases failed in some way. Most of these were dismissed (41%), and the remainder were converted to another chapter or transferred to another district.9 Unfortunately, the data do not indicate whether dismissal or conversion came before or after confirmation, since the Administrative Office of the U.S. Courts does not collect data on a case's confirmation status. Caution must be exercised in drawing conclusions from Table 4 about the various rates because some types of termination are more likely after a case has been in Chapter 12 for a number of years than after just a few months. For example, comparing rates between 1987 and 1992 must be done carefully and with due consideration to the time differences. During 1986_88, the annual percentages of terminations are about the same; i.e., between 85 and 89% of the filed cases have been terminated.10 9The reported number of conversions does not include farmers who are dismissed and subsequently file under another chapter. 10It is interesting to note that 11.6% of the cases filed in 1986 and 1987 were still open as of September 2, 1994. This may seem odd, because the maximum plan length is five years. Also, the pre-confirmation phase is not supposed to take more than 135 days, although the court can extend this time for cause. It would be illuminating to know why 11.6% of the cases were still open as of September 2, 1994, particularly those 92 cases filed in 1986. Some possible explanations are that the case closing process can require several months after completion of plan payments, and closing may be delayed bypending litigation.
Source: Administrative Office of the U.S. Courts. Note: Figures include observations from Puerto Rico; "Total Terminated" also includes 49 cases that were transferred from one district to another. Table 4 clearly demonstrates that the later a case was filed, the more likely it is to result in dismissal. For example, of the cases filed in 1986_88, 27% were dismissed. For the years 1989 and 1990, 39% of the filed cases have already been dismissed. While it is conceptually possible that many of the remaining open cases from the period 1986_88 will be dismissed, this is probably unlikely for cases that have been performing satisfactorily under an approved plan for a number of years. Thus, it would appear that cases filed in later years are more likely to be dismissed. Analysis of the rates of conversion to other bankruptcy chapters reveals a different pattern. In the years 1986_88, approximately 14% of the filed Chapter 12 cases were converted to Chapters 7, 11, or 13. In the years 1989_90, 11% were converted to another chapter. Clearly, a higher percentage of the cases in this latter period remain open, so that the number of conversions on a proportionate basis might be higher for the remaining cases in the later periods. Alternatively, more cases in the latter period have already been dismissed, so that could lead to a lower number of potential conversions. Thus, it appears the rates of filed cases using conversion as a means of termination probably are not increasing over time. Table 4 also clearly shows that Chapter 7 was the chapter of choice for farms in Chapter 12 electing to convert to another chapter. Of the 1,797 conversions, 1,371 (76%) of these were to Chapter 7. As argued earlier, this finding supports the conjecture that most farmers filing for bankruptcy and not using Chapter 12 probably utilize Chapter 7. It is much more difficult to draw conclusions for the cases from 1991 onward. These cases have been in bankruptcy for a relatively short time. Thus, the proportion of cases converted or dismissed will grow. It is clear, however, for 1991 and 1992 that the dismissal rate likely will be higher than in earlier years. The dismissal proportions for 1991 and 1992 already exceed the proportion in 1987, and more than one-half of the cases filed in 1991 and 1992 are still open. It seems reasonable to assume an even higher proportion of recently filed cases will be dismissed. This, in turn, implies that confirmation rates probably are declining over time, because an early dismissal likely indicates dismissal before confirmation. Analysis of Regional Data <top> Discharge and dismissal rates have not been uniform across regions. For the years 1986_88, the discharge rate of cases filed ranges from 25.9% in the Northeast to 56% in the Delta States. In fact, in four regions—Delta States, Southeast, Corn Belt, and Northern Plains—the discharge rates for this period are in excess of 49%, with the remaining six regions having discharge rates less than 40.4%. Except for the Southeast, these regions with high discharge rates are situated in the center of the U.S., where the debt crisis hit first, and these three regions are reliant on crops whose prices rose in the late 1980s. Dismissal rates (proportion of cases dismissed to cases filed) over 1986_88 also exhibit definite patterns of regional variation. The highest dismissal rates are in the west. The Mountain and Pacific regions have values of 42.7% and 44.6%, respectively. The lowest dismissal rates are in the Delta States and Northern Plains, with rates of 21.6% and 17%, respectively. With the exception of the Corn Belt at 24.6%, the other five regions have rates within three percentage points of 30%. The regional variation in discharge and dismissal rates is probably not related to overall termination rates because eight of the 10 regions have termination rates between 80.1% and 93.8%; the two exceptions are the Northeast at 70.7% and the Mountain region at 95.3%. The higher discharge rates and corresponding lower dismissal rates in the center of the country compared with the opposite situation in the west could result from a number of factors. Courts may have exhibited a lower propensity to confirm in the west, or economic conditions and government actions may have made success in Chapter 12 more likely in the center of the country. Conversion rates for 1986_88 show considerable variation across regions. The Lake States have by far the highest proportion of filed cases that were converted as of September 2, 1994, with 23.6%. The Appalachian region is next highest with 18.7%, and the remaining regions have rates ranging from 9.9% for the Pacific to 15% for the Southern Plains. Although a court can dismiss a case at any time for cause, the decision to convert to another chapter usually originates with the debtor. Thus, assuming courts in regions other than the Lake States and Appalachia had no greater propensity to deny conversions to other chapters, it would appear that farmers in these two regions behaved somewhat differently from farmers elsewhere. A final implication of Table 4 is the length of time spent in Chapter 12. It clearly is not a short process. First, the pre-confirmation phase is likely longer than that set out in the Bankruptcy Code. Flaccus and Dixon observed such a situation for a sample of Arkansas cases. Although the Code specifies a three-year plan that can be extended to five years only with court approval, Flaccus and Dixon noted that the 18 cases in their sample that completed plans took a median of four years after confirmation to do so. Moreover, termination by other means is not likely to come quickly either. Thus, a farmer initiating a Chapter 12 petition should be willing to commit the necessary time and effort. Conclusions <top> Chapter 12 bankruptcy legislation was implemented to save the family farm by providing a reorganization procedure uniquely designed to help family farmers continue farming. Farmers used Chapter 12 much more intensively in 1987 and 1988 than subsequently, and the highest use has been in the Corn Belt and Northern Plains. The disparity in filing rates over time and region probably reflects the differences in degrees of financial stress and applicability of Chapter 12 provisions, but this remains to be investigated more thoroughly. Clearly, with the major form of reorganization relief coming from the ability to write down secured debt to current levels of the market value of the asset, Chapter 12 benefits farmers whose encumbered assets' market values declined substantially after the debt was incurred. Not all financially distressed farmers chose Chapter 12. The data from the Missouri study (Matthews et al.) and comparison of Chapter 12 filing rates with other farm bankruptcy rates indicate a sizable proportion of farmers were selecting other bankruptcy chapters. This appears to be a trend growing over time, although if financial circumstances were to deteriorate in the farm economy overall, this trend might reverse itself. Also, many farmers in Chapter 12 converted to another chapter, primarily Chapter 7. We also suspect that many farmers who get dismissed from Chapter 12 subsequently go into Chapter 7. Recent increases in Chapter 13 debt limits, enacted in October 1994, might also encourage farmers to use Chapter 13 more frequently than in the past. However, both Chapters 12 and 13 are rehabilitations, so the new debt limits may not change the proportion of rehabilitations to liquidations. The declining trend in Chapter 12 use in both relative and absolute levels might also indicate that a growing number of farmers and lenders have been able to arrive at a resolution of differences outside of formal court proceedings. Moreover, farmers might be self-selecting themselves out of using Chapter 12 on the basis of their own or others' perceptions of their likelihood of success in Chapter 12 given the experience of other farmers. In any event, fewer farmers have recently used Chapter 12, and those who did are experiencing a relatively lower success rate. The declining use rates of Chapter 12 might also reflect the impact of the changing structure of agriculture. Chapter 12 was legislated to protect the family farm; the income, ownership, and debt requirements discussed earlier are designed to achieve this goal. As commercial family farms become larger and inflation continues, increasing debt limits might be required to maintain access for the originally intended group of farmers. The Bankruptcy Reform Act of 1994 added a provision to the Code to automatically adjust certain dollar amounts every three years. The debt limits for filing in Chapter 13 are among those amounts to be adjusted, but the debt limits in Chapter 12 are not. Also, as farmers diversify income sources to achieve greater financial security, the 50% gross income test may exclude many farmers who would benefit by Chapter 12. The data and analysis presented in this study indicate that Chapter 12 has been used by a substantial proportion of distressed farmers; however, it is far from being the chapter of choice for all farmers. This is not a criticism of Chapter 12 as such, because it was never intended to be used by all financially distressed farmers. Chapter 12 is undoubtedly being used as a frame of reference for negotiations outside of court between debtors and creditors. Thus, even if current Chapter 12 filing rates are not high, changes in the structuring of Chapter 12 could have significant implications for farm financing. References <top>
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