J.T. Korkow: Bankruptcy in Ag Country
November 4, 2015
I thought while I have been on this credit kick recently, I might comment a bit on the subject of filing bankruptcy. While the recent years have been reasonably profitable in the ag community, there are many of us "older folks" who still remember the '80s, and what low commodity markets, high interest rates, and increasing production costs can do to an operation. Agriculture requires a lot of capital to sustain production, let alone trying to get started. And although interest rates are not considered high as compared to the 1980s, it seems other production costs have succeeded in diminishing the producers' profit margin. With so little of the population actually connected to the agricultural community now, the new generation in charge of equipment and parts sales, fertilizer sales, insurance coverage and banking have little consideration for their customer trying to make a living on the land and seem to gouge their ag customers any way anytime they can. Then there is the government coming in with their rules and regulations to abide by… well, that will need to be subject matter for another day.
Many of you may view bankruptcy as a loser's last ditch effort to "save the farm," but after having prepared more than fifty bankruptcy plans over the years, I soon changed my mind and see it as a management tool for any business. As I discussed in my last commentary, there are many bankers who have tendency to get too much involved with advising their ag customers on how to manage their operations when often times their "crystal balls" are no better than the neighbors'! Yet, when the operation fails, you will be the only one who suffers the consequences of poor advice and made to feel the failure. It is then one needs to consider whether bankruptcy may be an option.
In 1987, a temporary law was put in the bankruptcy code commonly known since then as Chapter 12, which was much later made a permanent chapter in the code. Chapter 12 deals only with reorganization of agricultural debt and may or may not include a charge-off of debt. Unlike a Chapter 11 bankruptcy reorganization (for commercial businesses), the creditor in a Chapter 12 may only object to the plan and bring testimony to the bankruptcy judge for consideration and the judge has sole discretion as to confirming the plan or not. To compare, in Chapter 11 creditors are divided into classes and each class requires a majority vote to confirm the plan, and the judge acts more like a referee.
In my past experience of helping debtors prepare their reorganization plans, I made note that many lenders had failed to structure their loans appropriately for the types of operations they were dealing with, which would cause the default in the first place. One ongoing example of this is the five year balloon on a real estate secured loan. This loan structure has always struck me as being the ultimate faux pas in ag lending. As an ag lender, you are continually pressured to obtain new customers and try to make long term relationships with them, yet the banks will not commit to any longer term than five years on a full real estate secured loan, with the mindset the loan can either be re-written at a new interest rate, or the customer can be "let go" if he doesn't prove himself to be worthy. Talk about non-commitment–kind of like a summertime affair!
Friends, after five years of having not worked in the bankruptcy court, I was summoned this past week to work on one of the first Chapter 12s to be filed in Montana after several years. In discussing a "bigger picture" with the attorney, he believes this may just be the start of another wave of filings due to lower grain and cattle prices. Couple that with a slowed coal industry, end of the oil boom, and high real estate values, and life could get interesting in ag country. The attorney also mentioned to me that lenders are not interested in working with their customers in restructuring their loans or rolling over any credits. Again, a further indication of a new generation of bankers with less background in agriculture and a disconnect with the ag community.
To conclude, bankruptcy may be considered to be another management tool for your ag business, should your run into obstacles with your lender. However, it is not cheap, as administrative costs can accumulate quickly, depending on any complexities within the case. It is good advice to consult with a bankruptcy attorney before making any decisions, as they can walk you through the process and give you some idea as to what to expect for costs. But filing will stop in its tracks any adverse action your lender may impose on you if worse comes to worse–let's hope that doesn't happen.
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"Have I not commanded you? Be strong and courageous, for the Lord your God will be with you wherever you go." Joshua 1:9