Navigating Economic Uncertainty: Essential Federal Rights and Strategies for Farmers:
As the agricultural industry faces a landscape of fluctuating commodity prices and rising interest rates, understanding borrowers’ federal rights has become a critical component of farm management. In a recent discussion, Jay Brunson, an attorney at Brunson Ag Law, shared vital insights with Farm Director KC Sheperd regarding the proactive steps farmers should take when facing potential loan defaults or financial restructuring.
The Importance of Early Communication
One of the primary themes of the conversation was the necessity of early intervention. Brunson emphasized that farmers are often the first to recognize the “weak links” in their operations, whether due to high input costs—such as $600 urea or $945 DAP—or low market prices.
The most effective strategy for managing potential default is to engage with lenders long before the situation escalates to litigation. Brunson noted that maintaining an open dialogue allows bankers to work with their boards to keep loans from being classified, potentially leading to a note modification or a partial liquidation rather than a total loss.
“Radio silence will lead to litigation faster than anything else.”
Understanding Chapter 12 Bankruptcy
For operations facing severe distress, Chapter 12 bankruptcy offers a specific framework for farm reorganization. This legal path is designed for farmers and family fishermen, provided that more than 50% of their gross income is derived from farming.
Key Features of Chapter 12:
- Automatic Stay: It halts foreclosure actions and litigation, providing the farmer breathing room to propose a workout plan.
- Debt Discharge: It allows for the discharge of debt that exceeds the current value of the operation’s assets. For example, if an operation owes $1 million but assets are valued at $250,000, the court may allow the debt to be restructured to match the asset value.
- Court Approval: If the court deems the plan reasonable and capable of generating cash flow, the loans can be rewritten to a manageable level.
Brunson cautioned that while Chapter 12 can save a farm, it carries significant repercussions, including a substantial hit to the borrower’s credit score and a diminished ability to secure new lending.
Tax Implications of Asset Sales
A common reflex for farmers in debt is to sell major assets to pay down loans. However, Brunson warned that without consulting both an attorney and an accountant, this can lead to a “capital gains nightmare”.
Many farmers in Oklahoma are working with land that has a very low tax basis—sometimes as low as $400—while current market values near areas like Tuttle can reach $30,000 per acre. Selling such land might satisfy the bank, but it could trigger a massive tax liability with the IRS on April 15.
Parallels to the 1980s
The current economic climate has drawn frequent comparisons to the 1980s farm crisis. Brunson acknowledged the similarities, noting 8%-9% interest rates on operating lines and the difficulty of earning a profit that can support a family while servicing high debt.
With the average age of the American farmer between 58 and 65, many are also weighing these financial challenges against retirement planning, making the need for expert legal and financial counsel more pressing than ever.
