Farmers can benefit from debt restructuring

Jan Shepel
Many farmers are facing a situation where their local banks are no longer willing to give them an operating loan, making filing for bankruptcy a real possibility.

MADISON – When attorney Paul Swanson put out his shingle, he intended to practice tax law, but as it happened the farm crisis of the 1980s was swinging into full gear and his first case involved a farmer who needed help. Because of the situation many farmers found themselves in then, Swanson – now a specialist in managing creditors, debt adjustment strategies and farm business reorganization -- says he sort of “fell into this area of the law.”

Swanson and his partner John Menn spoke to a packed roomful of farmers, ag suppliers and bankers during a March 14 session at the annual business conference in Madison organized by the Professional Dairy Producers of Wisconsin.

Swanson said this the fourth time during his career that farmers have been hit with a “farm crisis” adding, “it’s about the worst I’ve ever seen.”

A partner in the law practice, Steinhilber Swanson, with offices in Madison and Oshkosh, Swanson is also a State Court Receiver in liquidation proceedings supervised by Circuit Court judges and has served as a panel trustee for the United States Bankruptcy Court for the Eastern District of Wisconsin since 1982.

For farmers who are now facing feelings of helplessness because their milk prices have tumbled, making it hard for them to plan or look ahead, he advised getting ideas from resources that may be free to farmers. He recommended the financial advisors at the Farm Center in the Department of Agriculture, Trade and Consumer Protection. They can be reached at 800-942-2474 and offer help to farmers for free.

“The dedicated people there are devoted to saving family farms or if it’s hopeless, then they want to make sure the farmer falls softly,” Swanson said.

Attorneys Paul Swanson (left) and John Menn, spoke to farmers at PDPW’s annual business conference in Madison, offering advice for farmers who want to restructure debt or file for court protection.

Many farmers are facing a situation where their local banks are no longer willing to give them an operating loan. (At another farm meeting attended by Wisconsin State Farmer recently, one speaker said an ag lender told him candidly that 30 percent of his accounts were not going to get operating loans this year.)

Often banks are being “screwed down” by federal regulators, Swanson said, despite the fact that “the farm economy did not create the Great Recession.” There are a lot of small community banks that lend to a lot of farmers that have regulators “breathing down their necks,” he said.

Many small town banks have been bought up by a larger entity that doesn’t like to carry farm loans. So the agricultural portfolio is expendable. “These banks don’t have as much leeway as they used to,” Swanson added.

He warned farmers: “If your bank has been acquired because they were in trouble or if they have merged with another bank or if you are experiencing radio silence with your loan officer, it is not a good sign.”

This is especially true if the farmer loses his or her old loan officer, said Menn. “It’s almost an automatic precursor to losing your loan.”

Swanson noted that many of the people who come to his firm for help wait too long. “Don’t be proud. Being in financial straits isn’t fun, but if you’re smart you’ll get some advice.

“Get in sooner rather than later to get advice from tax professionals or attorneys,” he added. Waiting too long can limit options and put the whole enterprise under a cloud of desperation.

Menn adds that these days many farmers may be getting pressure from their bankers to liquidate their operations, but farmers need to get good advice first. If liquidating their assets is the best solution, it has to be done the right way to avoid pitfalls like huge tax liabilities. Farms that were bought for a small dollar per acre and now sell for thousands will trigger large capital gains taxes and farmers need to get advice from tax professionals, lawyers or others on ways to handle that.

Chapter 12 for farmers

Farmers who file for Chapter 12 bankruptcy protection – a special chapter of federal bankruptcy law that was instituted in the 1980s for family farmers and fishermen – can help mitigate those kinds of taxes, Swanson added.

The state of Wisconsin is divided up into eastern and western districts for bankruptcy matters and according to Swanson the western district of Wisconsin, with cases heard in a Madison courtroom, has the highest caseload of Chapter 12 bankruptcies of anywhere in the country.

The attorneys said that getting a second set of eyes on the farm’s books can be the key to helping a farm survive. “Gaining incrementally on efficiencies and improving the farm’s razor-thin margins may be enough for the farm to get by,” Swanson said.

When debts mount, pressure builds to all parties who are owed money by a farmer. “They smell blood in the water and want to start picking up the machinery,” Swanson said.

The various chapters of bankruptcy protection in many cases will be a way to pay people back, including the banker, in a way that buys some time. “A nervous banker is like a woman of ill repute in church – they’re both uncomfortable,” Swanson joked.

One option the lawyers discuss with clients includes Chapter 12, for family farmers who have a lower amount of debt. But it is by no means the only option. Another may be talking to various creditors and getting them to back off.

Chapter 7 is the cheapest way to discharge debt and get a fresh start. Chapter 13 can be used to get back on track and Chapter 11 is the most expensive way to seek bankruptcy protection. But farms with larger debts may need to use that chapter.

For farmers who qualify for it with debts below $4.153 million, Chapter 12 has a lot of advantages over Chapter 11, the attorneys said. Chapter 12 is relatively quick. (Swanson said there has been lobbying in Congress to get the debt limit raised to $10 million for Chapter 12, in the current farm crisis.)

Do your homework

That chapter is available to farms that are incorporated as Limited Liability Corporations or LLCs, he added. The Chapter 12 process is a fast one. Ninety days after the bankruptcy is filed there has to be a plan. “That’s why you want to have all that homework done ahead of time because it’s a short timeline,” he said. “It’s a fast, fairly efficient tool.”

In a planned restructuring through bankruptcy, Menn explained, monthly payments can be lowered. “You can take your amortization from say 10 years to 25 years.”

Under Chapter 12, the terms of secured debt can be modified. “Sometimes bankers just don’t get it and you have to send them a message,” Swanson said.

“There are a lot of different strategies. Every place is different. That’s why it’s good to talk to an experienced attorney,” said Swanson. “There are a lot of nuances to this.”

With Chapter 12, he said, “it’s a lot easier to keep the farm and not have to pay everybody back. It is the only chapter with advantaged tax treatments.”

Even after the Chapter 12 proceeding has gone through, Swanson said he advises people to continue to have some steers or chickens or other livestock – as a link to their former farming operation but also as a way to show that they are still farming.

Quite often the attorneys and their clients find that unsecured creditors are pleased with a bankruptcy proceeding because they know they will get paid over six or seven years rather than the alternative of liquidation, where they might get nothing, Swanson said.

Best deal for farmers

Whatever option is chosen, the goal is to get the farmer the best deal even if it means liquidating the operation. Because of its tax laws, Wisconsin has some pretty generous exemptions like the Homestead exemption at $150,000 and others, Swanson said. “A good lawyer can tell you about those.”

Before going into any kind of bankruptcy procedure, Swanson said some pre-planning is important and includes outlining any property liens and mortgages. Menn adds that through the bankruptcy process many farmers are able to reorganize, achieve better efficiencies and work out the best plan for them.

They encouraged farmers to talk to professional farm advisors to get good numbers that can be used in the bankruptcy process. “It doesn’t pay to go into an expensive process with bad numbers,” Swanson said.

While going through bankruptcy or liquidating a farming operation can be depressive situations, Swanson said that over the years he has run into many of his former clients and 99 percent of them are thankful things turned out as they did. “They tell me there’s life after dairy farming.”

As for the cost to the farmer of going into a bankruptcy proceeding, Swanson said 90 percent of their Chapter 12 dairy farm cases are for farms with less than 400 cows and will require a retainer ranging from $2,500 to $7,500. By the time the process is complete those cases can end up costing the clients a total of $10,000 to $25,000. “It depends on the complexity or simplicity of the case.”