Senate Approves Bankruptcy Reform

February 4, 2000

The Senate has passed a bill designed to reform the nation’s bankruptcy laws, including changes to Chapter 12 that applies to farmers. The House passed its version last summer, so the bills now go to conference for reconciliation.

Sen. Charles Grassley (R-IA), the bill’s chief proponent in the Senate, said the measure makes permanent an expanded Chapter 12 for farmers seeking to reorganize debt and still remain on the farm. The current financial situation in agriculture "underscores the need to get this safety net on the books for good," says Grassley.

The tax treatment of capital gains taxes is revised. Current law requires those federal taxes be paid first when a farmer sells assets. By making the government last on the creditor list, farmers would have more flexibility when reorganizing their operations. A farmer, for example, may need to sell livestock to generate cash for farming, Grassley explains. This provision would prevent the government from taxing that cash flow.

More farmers would be eligible for Chapter 12 protection under the bill. It would include farmers who receive more than half their income from the farm in any one of the previous three years, who have total debts of less than $3 million and whose debts are at least 50% farm-related.

Farmers would not have to obtain the consent of creditors before reorganizing. Grassley says lenders and other secured creditors could veto a farmer’s reorganization plan and that often led to families being forced off the land and out of business. Chapter 12 will prohibit lenders from foreclosing on property if the farmer is unable to make rental payments.