Farm Finance:

Participants' Views on Issues Surrounding Chapter 12 Bankruptcy

RCED-89-142BR: Published: May 15, 1989. Publicly Released: May 15, 1989.

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Pursuant to a congressional request, GAO provided information on Chapter 12 family farmer bankruptcy provisions, focusing on Minnesota, Nebraska, Louisiana, and Colorado bankruptcy participants' views on: (1) the provision's effects on credit availability and cost; (2) mandatory mediation as an alternative to Chapter 12 for resolving repayment problems; (3) Chapter 12 eligibility criteria; (4) the appropriateness of the legislatively mandated plan filing and confirmation milestones; and (5) Chapter 12 sunset provisions.

GAO found that, although estimates indicated that about 30,000 family farmers could file for Chapter 12 bankruptcy during the program's first year, only 8,527 farmers filed petitions. GAO also found that creditors: (1) expressed reluctance to lend to farmers, with one-third raising interest rates as a result of the new provisions; (2) were more reluctant to lend to farmers filing for bankruptcy than to other farmers; (3) preferred state-mandated mediation, requiring debtors to negotiate debt repayment, prior to pursuing other legal remedies for debt nonpayment; (4) believed that Chapter 12 eligibility requirements were too lenient; (5) believed that plan filing and confirmation milestones were reasonable but frequently not met because of crowded court dockets and failure to negotiate plans; and (6) generally agreed that the provision should expire by its sunset date. GAO also found that: (1) the Farmers Home Administration, as lender of last resort to farmers, had little discretion to deny loans and did not change its interest rates to reflect the bankruptcy provision; (2) legal practitioners felt that the bankruptcy eligibility requirements were too restrictive, and that more farmers should be allowed to file for Chapter 12 bankruptcy; (3) legal participants agreed that plan feasibility and crowded court dockets made it difficult to meet plan filing and confirmation milestones; and (4) legal practitioners also agreed that the provision should expire by its proposed sunset date.

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