Legislation corrects Supreme Court ruling that made it harder for family farmers to reorganize their finances when they fall on hard times.

October 25, 2017

3 Min Read
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A bipartisan measure making it easier for family farmers to reorganize debts when facing bankruptcy received final approval in Congress Tuesday and is headed to the President’s desk for his signature.

The Family Farmer Bankruptcy Clarification Act of 2017, sponsored by Sens. Chuck Grassley (R., Iowa) and Al Franken (D., Minn.), was included as part of the supplemental appropriations package, which the Senate approved by a vote of 82-17. The measure would rectify a 2012 Supreme Court ruling on a previous bankruptcy reform law that ignored Congress’ express goal of helping family farmers.

The May 2012 Supreme Court ruling said amendments made to the Bankruptcy Code in 2005 -- which restricted the Internal Revenues Service’s (IRS) veto power over a family farmer’s ability to reorganize in bankruptcy in certain situations -- unfortunately failed to achieve the express goal of Congress to help family farmers.

“Family farmers face obstacles that others don’t when dealing with bankruptcy. Their assets are largely tied up in farmland, which creates significant challenges for these family operations when reorganizing debt. Years ago, Congress took specific steps to address these disadvantages, but the Supreme Court failed to recognize Congress’ intent when evaluating the law,” Grassley said. “Thankfully, Congress has now approved a fix for this problem, and family farmers facing hard times can breathe a sigh of relief. I look forward to the President signing this bill into law.”

The Family Farmer Bankruptcy Clarification Act clarifies that bankrupt family farmers reorganizing their debts are able to treat capital gains taxes owed to a governmental unit -- arising from the sale of farm assets during a bankruptcy -- as general unsecured claims. It also removes the IRS veto power over a bankruptcy reorganization plan’s confirmation, giving the family farmer a chance to reorganize successfully.

Chapter 12 recognizes the unique situation family farmers face when reorganizing through bankruptcy proceedings. It was made permanent in 2005 after nearly 10 years of congressional debate to fine-tune the bankruptcy laws. Chapter 12 allows family farmers to sell portions of their farms to reorganize without capital gains taxes jeopardizing the reorganization. Before the permanent law was in place, IRS was able to collect any tax liabilities generated during a family farmer bankruptcy reorganization. Too often, when IRS took its cut through the capital gains taxes, there was no money left to pay other creditors, like the local feed store or the local bank. So, the farmer had to sell the rest of his land and still lost the family farm.

Congress’ intent in the 2005 bankruptcy reform law was to create a narrow exception through Chapter 12 stipulating that, if a family farmer sold land that resulted in a capital gains liability, then the IRS claim, alone, would not block the confirmation of a reorganization plan.

"Our bipartisan bill is a commonsense fix to ensure that the law functions as intended and protects family farmers in Minnesota and across the country,” Franken said. “I’m glad this bill is set to become law and will help ensure farmers going through bankruptcy get a fair shake and are able to repay the debts they owe without sacrificing their families’ futures.”

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