Sen. Charles Grassley, R-Iowa, is working to make the Chapter 12 federal bankruptcy provision permanent for family farmers everywhere.

“Chapter 12 is a section of the federal bankruptcy laws started Oct. 26, 1986 to provide a bankruptcy alternative better suited for family farmers,” said Neil Harl, distinguished professor of economics.

Harl explained that Chapter 12 is limited to family farms with no more than $1.5 million of debt.

For families to be eligible, 80 percent of the debt must come from the farming operation, and for individuals to be eligible, more than 50 percent of their taxable income must come from the farming operation.

Chapter 12 expired in September 1993, but it was extended for five years.

Since 1998, the plan has been extended six months at a time until Oct. 9, when President Clinton signed a nine-month extension.

Now several members of Congress are working to make Chapter 12 a permanent bankruptcy chapter.

Grassley is chairman of the Senate Judiciary subcommittee leading a package to expand and make Chapter 12 permanent.

“I am confident Congress will see fit to put bankruptcy protection for farmers and ranchers on the books for good,” Grassley said.

One of the important parts of Chapter 12 is that farmers can generate cash flow by selling crops and livestock through the plan, Grassley said.

The plan also gives farmers added leverage when working with lenders.

Grassley believes the provision helps get the borrower and banker to sit down and work out alternatives for debt payment.

“The farmer gets a write down of secured debt, which is considered unsecured during the term of the plan. Unsecured debt remaining at the end of the plan is discouraged,” Harl said.

Harl conducted several studies showing the success of Chapter 12. He contacted the first 175 filers under Chapter 12 in 1987. He collected information about them and talked to the same group seven years later.

“The results found that Chapter 12 was very helpful,” Harl said. “About 84 percent were either still in farming or still owned farm land.”

The U.S. Senate Judiciary cited the study in 1995 in a news release calling for Chapter 12 to become part of the Bankruptcy Code, Harl added.

Grassley said the study conducted at Iowa State showed how important this plan is.

“It’s a proven success that gives family farmers a second chance to keep their livelihood,” he said.

Harl agreed with Grassley that this provision is especially important now.

“The farm woes currently are severe enough to assure that Chapter 12 will be used,” he said.