July 23, 2018
We’ve expanded our dairy to meeting three family living needs. But over the past 10 years, we’ve seen only three profitable years, two so-so years, two years of losing money and now a third. Our banker has threatened foreclosure. Our intermediate debt ratio is upside down, and we have no room for more long-term debt. Is Chapter 12 really an alternative?
Mike Evanish: Hasn’t caught on here
I’ve seen estimates that perhaps as many as 25% of total dairy farms are currently in some level of financial distress. From your question, it appears you fall into this category.
Chapter 12 was designed as a short-term fix for farms experiencing financial difficulty. Most plans last from three to five years. At the end, debtors are to have their financial house in order — certainly not an easy task.
This plan is somewhat expensive to carry out. First, all court and other administrative costs, including a court-appointed trustee, must be paid. Think of it as a fourth family drawing on the business’ cash flow. Next, secured creditors must be paid at least as much as they would if the secured assets were sold. This can make monthly payments impossible. Then, there are the unsecured creditors that the court may or may not require payments to.
If your farm falters and you are unable to meet the payments, it’s back to court where a judge will decide your fate. Chapter 12 can be switched to Chapter 7 liquidation if the judge decides that’s best for the creditors.
George Mueller: Time for a dramatic change
I know nothing about bankruptcy laws. But perhaps Chapter 12 will give you time to make essential changes necessary to turn your business around. Or perhaps you’ve gotten too deep in debt. Either way, do the best you can for your creditors by being honest and open with them as a bankruptcy process moves forward.
Whether it’s time to sell out or to make dramatic business changes, I strongly suggest you contact New York Farm Net at 607-255-4121 or nyfarmnet.org if you farm in New York State — or a similar organization in your own state — to give you needed guidance.
Many farm families have been well-guided by Farm Net, including one of our sons. In his case, they decided dispersal was the best route. They helped him find better markets for his animals, land and other assets. Their “from the outside” view is very valuable.
Hopefully, you can save your business by making hard and intelligent choices. Perhaps more cows and less cash crops are the answer. Perhaps fewer family members on the payroll may be necessary. Either way, there’ll be a lot of hard and careful work ahead. Good luck as you enter your next farming chapter.
Glenn Rogers: The only option in some cases
Chapter 12 bankruptcy was designed specifically for farmers and fishermen. It’s not Chapter 7 bankruptcy, which is for dispersal. While not ideal, it’s the only viable option in some cases.
I highly recommend you seek out at least two people in addition to the secured banker(s) on your case. One should be a reliable farm financial adviser who can quickly get up to speed on your financial situation and devote time to the project. The other should be a good Chapter 12 bankruptcy attorney who’ll lay out all the items.
Many dairy farms have outstanding credit card bills, open farm store accounts and past due grain bills because of the milk price downturn. Some or all of these bills might possibly be dispensed of with Chapter 12.
The secured lenders will get paid over time under your agreement. In some cases, the secured creditors may get paid out over 40 years (not seven or 20 years), and at possibly reduced interest rates. Perhaps certain debts might be reduced.
However, every case is different, depending tremendously on your records, your efforts to straighten this out in the past, what you’re doing to rectify the situation now and what future projections look like.
Don’t do this lightly; It’ll cost time and money, and strict court ordered items must be followed. I recommend researching it if your situation warrants it. Here are a few quick things to know first:
• The court-appointed trustee will get a monthly payment in addition to the bankers. Check with your tax person to determine what the income taxes will be as loan forgiveness is taxable income.
• Chapter 12 bankruptcy will affect your credit score. You’ll probably continue to have difficulty obtaining credit, so prepare to pay cash on delivery.
• While Chapter 12 proceedings may move through the court system in six months or less, required details before filing can be difficult. Once in Chapter 12 process, you can convert to a Chapter 7 dispersal.
• Remain friendly with your secured lender(s), and keep them informed. You’ll be working with them after the conclusion of Chapter 12.
• Contact more than one Chapter 12 bankruptcy attorney. Fees, resources and schedules vary widely. Learn all you can, keep great records and prepare to change your operation.
• It’s my understanding that under certain circumstances, one spouse can declare Chapter 12, but leave the other spouse out of it. This can be beneficial for farmers who have spouses who work off the farm, have separate business or other special situations.
Got a question? Our experts await!
Our Profit Planner panel would like to hear it. The panel consists of Michael Evanish, farm business consultant and business services manager of Pennsylvania Farm Bureau’s Members’ Service Corp.; Dale Johnson, Extension farm management specialist at University of Maryland (unavailable for this question); George Mueller, dairy farmer from Clifton Springs, N.Y.; and Glenn Rogers, University of Vermont Extension professor emeritus and ag consultant.
Send your questions to “Profit Planners,” American Agriculturist, 5227 Baltimore Pike, Littlestown, PA 17340. Or e-mail them to [email protected]. All are submitted to our panel without identification.
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