Bankruptcy Law : Farm Saga: Chapter 12 Tells of Hope

Robert and Jan Stansberry got advice--not money--when they applied for a loan to operate their farm this year. Quit farming, liquidate, line up the machinery and have a farm sale, they were told.

That was last January, when the Farmers Home Administration turned down the couple’s loan application. “They said it didn’t look like we could pay them back the $225,000 we owed them,” Jan Stansberry recalls.

But, the Stansberrys, farmers for 16 years, did not quit. They are fighting.

They are among the first in the nation to declare “Chapter 12 bankruptcy”--using a federal law from the Depression era aimed at helping family farmers save the family farm. The law, revived and revised by Congress last year in the wake of the prolonged weakness in agriculture, generally protects farmers from creditors and from foreclosure or forced liquidation.

Most Filings in Nebraska

This spring, amid faint signs that the national farm crisis may be bottoming out, thousands of farmers still faced with massive debts are expected to turn to Chapter 12 for protection. Early figures indicate that in the Midwest, the largest number of cases has been filed here, in Nebraska.

Saving their 440-acre hog and grain farm will be a rough row to hoe for the Stansberrys, even with Chapter 12.

The couple, who have three teen-age daughters, were $289,000 in debt before going into court. They now must pay back at least $66,800.

To do that they will not rely entirely on agriculture--a slender financial reed to lean on in recent years. Instead, both Jan and Robert are holding down full-time jobs off the farm. Jan is working as a secretary. Robert is fixing sewers and waterlines for the village of Walthill. He makes $1,150 a month. Jan earns less.

Works ‘Nights, Weekends’

That leaves “nights and weekends to get the crops planted,” says Robert, who has just had his first free Sunday in 10 weeks. “This spring has been more hectic than any I’ve ever put in.”

“I feel sure the farm can support the bankruptcy and what we make in town will support us,” Jan said.

Chapter 12 bankruptcy gives farm families “a fighting chance to reorganize their debts and stay on their land--a chance that they did not have before,” says Sam Gerdano, a legal aide to Iowa Republican Sen. Charles E. Grassley, a sponsor of the Chapter 12 legislation.

“This is the most useful tool available to family farmers in a long time,” says lawyer Nancy L. Thompson, who specializes in agricultural law in northeast Nebraska.

Considerably less enthusiastic are bankers and insurance companies, who lobbied against the legislation because it is weighted in favor of indebted farmers and, in almost all cases, will result in lowered, renegotiated debt balances and repayments.

“It increases the risks that lenders may not be repaid,” says Curt Billhymer, a spokesman for the Farm Credit Banks in St Louis. “Anything that does that makes lenders less willing to make the flow of capital to borrowers completely free.”

“Farmers are using Chapter 12 as a tool, as a weapon to put pressure on to get lenders to be more accommodating,” says Ronald C. Hanser, spokesman for the Omaha District of the Farm Credit System.

But farmers who have turned to Chapter 12 see no alternatives short of losing the farm.

“I’m struggling to beat heck trying to save this homestead,” says Herman H. Lauck, who was $160,000 in debt before filing for bankruptcy. The 64-year-old Bloomfield, Neb., farmer lives on food stamps now. In a few weeks he will have to farm using borrowed machinery. His own is being sold to pay off a $34,000 bank debt.

‘God Bless This Mess’

“It just jerked my heart from me when they told me I had to sell my machinery,” says Lauck, sitting under a sign in his kitchen that says, “God bless this mess.”

Not far away, as distance is measured in the rolling northeastern Nebraska countryside, Gerald Herzinger, 56, is weighing the possibility of a Chapter 12 case to save his dairy and grain farm.

“We’ve been threatened by creditors,” he says. “So far the lawyer has been able to hold them off. The bank came to a settlement when we threatened them with bankruptcy,” says Herzinger, who has $341,000 in debts and has seen several neighbors turn to the law for protection. If Herzinger does file, it is likely that he will repay about $102,000 of his debt--assuming his farming operation can generate that much income over the next three to five years.

Herzinger’s debt will drop because a major provision of the law--a provision that bankers do not like--allows a farmer’s debt to be adjusted to reflect the current value of his collateral rather than what that collateral was worth at the time the loan was made. For example, a $200,000 loan secured by land that was worth $200,000 in 1979 might translate into a debt of less than $100,000 today because of the sharp drop in agricultural land values.

“This is a pro-debtor piece of legislation,” says Barry M. Barash, a Galesburg, Ill., attorney who has filed 40 Chapter 12 cases this year. “I tell people that if you’re a farmer, Chapter 12 is the best investment you’ll make in 1987.”

Other features of this special federal bankruptcy law--which will expire in 1993 unless renewed by Congress--are provisions that give farmers a chance to erase unsecured debts and that leave all major decisions about how the farmer will work out of his indebtedness in the hands of the farmer and the judge. Creditors have little to say about the process--another reason the banking industry does not care for the law.

“We opposed it,” says Weldon Barton, a Washington spokesman for the Independent Bankers Assn. of America. “We supported voluntary incentives that would encourage voluntary workouts (of problems) because we thought it was a more workable situation for lenders and for farmers. Most lenders would rather (Chapter 12) was not out there.”

However, David Aiken, an agricultural law specialist at the University of Nebraska, said that the law may, in fact, be acting as a legal incentive to bankers to negotiate settlements with indebted farmers.

“Now lenders know that if a farmer isn’t able to get a satisfactory negotiated arrangement outside of bankruptcy, the farmer can file Chapter 12 and get significant debt write-down in most cases,” Aiken says. “That’s made private lenders more willing to accept write-downs outside of court. It’s changed the rules of the game, and it has given farmers some clout in terms of these negotiations.”

Although thousands of farmers are expected to file for bankruptcy under provisions of Chapter 12, it will be 1989 or 1990 before the success of the law can be assessed. Meanwhile, farmers who might otherwise have been forced into foreclosure or involuntary liquidations this spring are getting a chance to save their farms and their dreams.

“You don’t want to give it up,” Jan Stansberry says. “We think farming might be a good business again, and it is too expensive to start up again once you give it up.”

Speaking of Chapter 12, Robert Stansberry says: “My first thought was I didn’t want to use it. When you say ‘bankruptcy’ people look down on you. Or at least I think they do. But if I didn’t do it I’d had probably had to go to complete liquidation.”

“The word ‘bankruptcy’ has a stigma attached to it,” Jan says. “We didn’t know how people would react, but nobody has said anything.” Except for the local banker. “He said: ‘It’s the only chance you have to remain on the farm.’

“It wasn’t an easy thing for us to do,” she adds. “But I’m sure we’re going to survive it.”

Times researcher Wendy Leopold contributed to this story.