Why Might Farmers Be Choosing Subchapter V?

By J. David Krekeler

Farm bankruptcy filings under chapter 12 have been declining over the last several years. Wisconsin led the nation in chapter 12 reorganization case filings in 2017, 2018 and 2020. The filings over the last five years have been the lowest since chapter 12 was made permanent in 2005, with only four cases filed in 2023 and only two as of November 2024.1 The trends have been the same nationally (Exhibit 1 shows the number of chapter 12 cases filed in 2017-24). While farm reorganizations have declined, filings under subchapter V have dramatically increased, as illustrated in Exhibit 2.

There are a lot of possible reasons for this decline, and it is almost certainly due to no single factor. For example, the total number of U.S. farms has dropped by nearly 150,000 since 2017.

Farmers saw record-breaking income in 2022, but that dropped precipitously from 2023-24. Land values have continued to increase, providing farmers with more collateral and more equity cushion, as well as the ability to stave off a bankruptcy filing for a longer period of time.

However, the numbers also suggest that more farmers might be seeking subchapter V relief, thus lowering the numbers for chapter 12. While farm bankruptcies have been dropping, the number of subchapter V cases has grown steadily. A comparison of the costs and benefits of these two forms of relief reveals some good reasons as to why some farmers are among the small businesses taking advantage of subchapter V.

Factors Favoring Subchapter V

Trustee Assistance

Subchapter V trustees may assist in getting a plan confirmed. Section 1183(b)(7) of the Bankruptcy Code provides that the trustee is to facilitate the development of a consensual reorganization plan.

The handbook for subchapter V trustees directs the trustee to discuss a proposed plan with the debtor and the debtor’s principal creditors. It specifically states that the trustee should be proactive in promoting and facilitating planned negotiations. It also points out that the trustee may even participate in plan negotiations. Chapter 12 trustees rarely perform such a function.

Status Conference

A status conference is required to be held by the court within 60 days after the order for relief.2 The debtor is required to file a report at least 14 days prior to the conference, and this report is to detail the debtor’s efforts to attain a consensual plan.3

Some might say that these requirements make subchapter V less attractive, but in many respects, this early requirement to work on a plan is beneficial to the debtor. It better prepares the debtor to meet the 90-day deadline for filing a plan. While chapter 12 debtors could certainly do this on their own, these requirements ensure that progress is being made, and progress is good for the debtor.

Potentially Earlier Discharge

If a subchapter V plan is consensually confirmed, the general discharge provisions of chapter 11 apply.4 The discharge is granted on confirmation.

A chapter 12 discharge, or a subchapter V discharge for a nonconsensual plan, does not apply until the completion of all plan payments.5 Chapter 12 debtors may continue payments to long-term secured creditors without affecting the discharge, but they might also qualify for a hardship discharge, which is rare.6

The discharge on confirmation can be extremely valuable. Three to five years is a long time, and a lot can happen to a debtor over that period. Death, disability, changing markets and a host of other factors could result in an interruption or termination of planned payments and in turn prevent the debtor from ever receiving a discharge.

Trustee Fees

Some subchapter V debtors can save significant sums on trustee fees compared to chapter 12. Chapter 12 trustee fees are paid through the plan, normally 10 percent in most jurisdictions.7 Subchapter V trustees are generally paid on an hourly basis, with fees approved by the court under § 330.

For cases with low-totaling plan payments, the chapter 12 trustee fees could be less than the fees of a subchapter V trustee. However, the hourly subchapter V trustee fees will likely be less than chapter 12 trustee fees in cases with large distributions to creditors. The demarcation point will vary, depending on the trustee rate in one’s jurisdiction, the hourly rate of the subchapter V trustee and the complexity of the case. The savings begin when plan distributions total $200,000 or more. In addition, subchapter V debtors might also be willing to pay a bit more to their trustee in return for the facilitation efforts of the trustee, as previously described.

When and Why Is Chapter 12 a Better Choice?

Dismissal

Chapter 12 debtors may have their case dismissed on request, provided it has not previously been converted from chapter 7 or 11.8

Special Tax Benefits

Chapter 12 contains special tax provisions to deal with capital gains that may arise from the sale of assets either prior to or during the case and prior to plan confirmation. These claims are not entitled to priority status under § 507; instead, they might be treated as general unsecured claims and may be discharged under § 1228.9

These tax provisions can be extremely valuable for farmers, as the principal assets held by most farmers are land and equipment. The land often has a low tax basis, but even farmland acquired in the last few years has probably appreciated by 30 to 40 percent or even more.10 Equipment is often fully or substantially depreciated, and farmers can face large tax bills on sales.

Nonetheless, taxes must still be paid if the farmer has nonexempt assets. The value of those assets must be paid into the plan under the best-interests-of-creditors test, which applies in both chapter 12 and subchapter V.11

Eligibility Debt Limits

The current debt limit for chapter 12 is nearly $11.1 million, compared to just over $3 million for subchapter V. At least 50 percent of the aggregate noncontingent, liquidated debt for a chapter 12 filing must arise from a farming operation,12 while 50 percent of the subchapter V debt must arise from commercial or business activities.

These eligibility debt limits are listed as an advantage for chapter 12, but there has been significant litigation over who qualifies as a “family farmer.” The case law developing the definition of commercial or business activities has tended to be broad in scope.

Chapter 12 requires that the farmer be “engaged in a farming operation,” but subchapter V only requires that the debtor be “engaged in commercial or business activities.” This latter engagement has been far more liberally construed, thus encompassing more types of businesses and at various stages of activity. Chapter 12 requires an actual operation, while subchapter V has been applied even to businesses that are winding down.

On its face, the debt limit favors chapter 12 filings, but this can change if the farmer faces a large tort claim. As farms have increased in size, the likelihood of such claims also has increased. Many operations now include a trucking component.

Such claims are unliquidated, at least until a trier of fact determines both liability and amount. The higher debt limit for chapter 12 refers to aggregate debts, whereas the subchapter V definition excludes contingent and unliquidated obligations.13 One other thing to note is that chapter 12 is only available to family farmers; other types of farm operations will not qualify.

Filing Fees

The chapter 12 filing fee is $313, but the subchapter V filing fee is $1,738.14

Modification of Principal Residence Security Interest

Chapter 12 allows the modification of such liens.15 However, subchapter V only allows modification if new value was received in connection with granting the security interest, and that new value was not used primarily to acquire the home but was instead used primarily in connection with the business.16

Plan Confirmation

Creditors in chapter 12 do not get to vote on plans, but they may still object.17 Subchapter V has a more complicated confirmation process. Balloting is conducted just as in a traditional chapter 11 case, but no consenting impaired class is required for confirmation if the plan (1) otherwise satisfies § 1129(a); (2) does not discriminate unfairly; and (3) is fair and equitable as to each impaired, nonconsenting class.18

Give or Take: Many Provisions Are Similar

Many of the provisions, powers and duties are the same in both chapter 12 and subchapter V. Both were enacted with the same underlying reason: that chapter 11 was not working for these particular debtors. In large measure, the problem for both farmers and small businesspeople was the absolute-priority rule, which does not apply in either type of reorganization.19 However, there are many other similarities between these two forms of relief. A few of the more significant similarities:

• U.S. Trustee Fees and Reports: Neither type of debtor is required to pay U.S. Trustee quarterly fees,20 and both types of debtors file periodic operating reports.21
• Automatic Stay: The automatic-stay provisions are basically the same, although chapter 12 extends the stay to co-debtors on consumer debts. In practice, this is of minimal value in most cases. There can be a minor advantage in chapter 12 when it comes to adequate protection, however. Chapter 12 specifically provides that adequate protection may be provided by reasonable rental value for the use of farmland.
• Avoidance Powers: Avoidance powers are basically the same for both types of debtors.
• Plan Exclusivity: Only the debtor can file a plan under both subchapter V22 and chapter 12.23
• Disclosure Statements: Neither chapter requires a disclosure statement, although debtors’ counsel will do well to provide substantial and adequate facts to support feasibility.
• Plan Modification: Plans in either chapter may be modified at any time prior to confirmation.24
• Conversion: Cases filed under either chapter may be converted to chapter 7 in most instances.25
• Plan Duration: Both forms of relief allow payments over three to five years. Debtors should want to finish as quickly as possible, unless a strategic reason exists to extend the plan. The subchapter V case law is still developing on this issue and is necessary, as Congress gave no guidance on how courts should set plan duration. Three years seemed to be the default duration period,26 but that might be changing, or at least subject to challenge.27

Conclusion

Subchapter V became effective in February 2020. Congress has finally realized that additional chapter 11 was not very useful for small businesses, having made the same determination with respect to farmers in the 1980s. Chapter 12 came about because traditional chapter 11 was not protecting family farms. Similar to chapter 12, subchapter V also provides a streamlined process for restructuring debts, and thus a more efficient and economic means of keeping small businesses in business. It is working, as plan-confirmation times are much shorter than traditional chapter 11 cases, and those plans are being confirmed at about double the percentage of traditional chapter 11 cases. The percentage of cases being dismissed is about half that of traditional chapter 11 cases.

The decision as to what form of bankruptcy relief to seek is not always an easy one, and it is not always limited to chapter 12 vs. subchapter V. Practitioners need to be aware of all available forms of relief, as well as the costs and consequences of selecting any of those forms. When it comes to choosing between chapter 12 and subchapter V, that analysis is no different.

Editor’s Note: ABI’s Subchapter V Task Force’s Final Report and recommendations to Congress is posted at subvtaskforce.abi.org. All members are invited to submit their experiences with subchapter V at abi.org/subvstories.

David Krekeler is the founder of Krekeler Law, SC in Madison, Wis. He also serves as a receiver in both supplemental and chapter 128 proceedings, and he is a member of both the Bankruptcy, Insolvency and Creditors’ Rights Section of the Wisconsin State Bar and the Western District Bankruptcy Bar.