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Release: March 29, 1999

Law Professor: Chapter 12 farmer bankruptcy provision should be made permanent

IOWA CITY, Iowa -- Congress recently enacted a six-month extension of Chapter 12, the 13-year-old provision that allows farmers to restructure debt. It was set to expire March 31, and while the extension is good news for farmers, the unpredictability of whether the law will be effective after October could leave many farmers facing financial uncertainty, says Pat Bauer, a University of Iowa College of Law professor

Chapter 12 has now been renewed three times since it was enacted in 1986 in response to the widespread and severe farm debt crisis of the 1980s. Chapter 12 provides farmers a way to adjust their debts so they are more in line with their assets and their current ability to pay creditors. Without it, Bauer says, many farmers will find it harder to survive if they are financially stressed.

"There are storm clouds on the horizon" for a family farm crisis, says Bauer, who specializes in agricultural finance law. He cites steadily declining pork and grain prices as examples of problems that could worsen if farmers are left without a safety net.

"The projections for agricultural income growth is low. If the economy goes south," family farmers will be adversely affected, Bauer says. In Iowa, state revenues have fallen below projections because of a lagging farm economy by an estimated $160 million.

"One of the most compelling reasons for a permanent Chapter 12, is it would protect family farmers if a severe natural or financial catastrophe were to occur" in the agricultural industry.

"If history is any guide, the absence of an existing provision specially adapted to the particular needs of family farmers will result in adverse circumstances," Bauer says.

Bauer says the farm crisis that befell many farmers in the 1980s was three years old before farmers began to receive government attention. That gap in time results in short-term problems that could be avoided, he says. Farmers could file for Chapter 13 protection, but it covers individuals only and then, only a limited amount of debt with shorter repayment periods, Bauer says.

In 1997 Sen. Charles Grassley, R-Iowa, who was the principal author of Chapter 12 legislation, unsuccessfuly led an effort to make the law permanent. The House Judiciary Committee approved the extension that passed the House by a vote of 421-0.

More than 11,000 farmers have filed for Chapter 12 bankruptcy since it has gone into effect. Bauer says making Chapter 12 permanent is reasonable, that there is little cost to consumers during good times and that it averts a broader crisis for the nation when it is widely needed and used.