An economic analysis of nontraditional lending in Chapter 12 bankruptcy cases

Abstract

PurposeNontraditional lenders are important credit providers for farmers. However, previous research has found that farmers who use nontraditional lenders are riskier lending opportunities. Using a unique dataset of Chapter 12 bankruptcy cases, the authors analyze the share of payment that is made or allowed by the courts on debt owed to traditional and nontraditional lenders.Design/methodology/approachThe authors use a Tobit model to calculate parameter estimates and marginal effects of the impact of creditor type (traditional/nontraditional) and debt classification (secured, priority and unsecured) on the proportion of a bankruptcy claim that lenders receive or are expected to receive when a case is discharged.FindingsThe authors find that traditional lenders with secured debt receive a greater repayment than nontraditional lenders. Meanwhile, there are more than twice the number of nontraditional lenders that are owed debt in these bankruptcy claims. While this raises concern for nontraditional lenders, that is mitigated some by the level of debt that is on average about one-sixth the size of the average debt of traditional lenders. Finally, the authors show there are numerous opportunities for future research in this area using case level bankruptcy data.Originality/valueThis paper fills a research gap by focusing on the state of nontraditional lenders in Chapter 12 bankruptcy cases and their treatment in discharged cases.

Guest editorial: Nontraditional Credit in U.S. Agriculture

“…Non-traditional lenders may be exposed to more default risk than traditional lenders. “An economic analysis of nontraditional lending in Chapter 12 bankruptcy cases” (Rabinowitz and Secor, 2022) examines the extent to which non-traditional lenders were able to recoup payment of secured debt in Chapter 12 bankruptcy cases. This paper finds that traditional lenders with secured debt were able to recoup a greater portion of their loans.…”