Financial woes leave farmers with 2 options
This past year has been extremely difficult for Wisconsin farmers. With increased debt loads and diminishing asset values, producers may be wondering if their farms will be viable businesses in the future. To be viable, a farm must be able to pay for its necessary assets over a reasonable period of time. In addition, its assets must be able to produce income greater than the cost to produce that income.
Farms in financial distress usually fall into one of two categories:
1. With some restructuring, the farm is likely to be viable in the future.
2. The farm has little chance to be viable in the future and likely will need to be liquidated.
Restructuring the farm
Many farms are in financial distress, but with some restructuring of their debts they can be successful again. Often, these farms have large unpaid bills but have sufficient equity and will have positive cash flow once the farm economy improves. These farms should first try to work with their regular lender to obtain additional financing, interest-only payments or a re-amortization of existing loans.
A farmer wishing to borrow money from his or her bank should prepare a financial plan to show the bank how successful the farm will be in the future. If the farm’s regular bank is unable or unwilling to provide lending assistance, the farmer should look into government loans such as those provided by the USDA Farm Service Agency.
Farms under financial stress typically have unpaid bills with those who supply them products and services. Often, these businesses have an open account with the farm. These open accounts, if left unpaid for more than 30 days, usually accrue interest at 18% per year (1.5% per month). A farmer should communicate with these businesses to negotiate a lower interest rate or a voluntary partial write-down of the amount owed. In the event of a bankruptcy, these businesses are usually the last to be paid or are left unpaid. As such, the threat of bankruptcy is frequently a good negotiating tool to achieve a voluntary reorganization and/or write-down.
If a farm is unsuccessful in obtaining additional loans from its bank and/or negotiating with its unsecured creditors, it may be necessary to involve the court system. Most often, this means filing a bankruptcy. A farm wishing to reorganize and restructure its debts likely will file a Chapter 12 bankruptcy. Chapter 12 of the U.S. Bankruptcy Code is a reorganization procedure specifically designed to allow farmers to continue running their farm operations while reorganizing their financial affairs.
The focus of a Chapter 12 bankruptcy is to come up with the “plan” to repay creditors. Under a Chapter 12 plan, secured creditors must be paid up to the value of their collateral. Typically, unsecured creditors are paid little. At the end of the plan, all unsecured farm debts are either partially or totally “discharged.”
Liquidating the farm
Sometimes, a farm must sell or liquidate all or substantially all of its farm assets to pay off its debts. This can be done voluntarily by a farm conveying any secured property to its secured creditors. Sometimes, unsecured creditors, such as those who have court money judgments or unpaid open accounts, are willing to receive cents on each dollar owed as an alternative to receiving nothing if a bankruptcy were filed.
If a farm is unable to get cooperation from its creditors, it may be necessary to seek court intervention under Chapter 7 of the U.S. Bankruptcy Code. In a Chapter 7 bankruptcy, assets are put into a bankruptcy “estate.” The estate is then sold or liquidated and the proceeds paid over to creditors. However, exempt assets and secured assets with debts that are reaffirmed do not have to be sold. Debts that are not reaffirmed are typically discharged.
During a farm’s liquidation, special consideration must be given to the tax implications involved. Whenever a debt is forgiven or property sold or surrendered, there is potential for recognition of taxable income. Fortunately, there are exceptions. Those liquidating their farms, either by bankruptcy, foreclosure or voluntary surrender, should consult with qualified tax advisers regarding the tax implications of such transactions.
Schneider is a partner in Twohig, Rietbrock, Schneider & Halbach S.C. in Chilton. The firm specializes in ag law.
This article published in the January, 2010 edition of WISCONSIN AGRICULTURIST.