Despite the alarming number reported in the media, Chapter 12 bankruptcy is not on the increase, yet. The reported 75% increase in Chapter 12 Bankruptcy filings was 2 more filings than this time last year. While farm bankruptcy numbers aren’t up, those operating in the shadow of bankruptcy continue grow. The shadows are where things aren’t to litigation yet, but it is clear absent joint action, litigation is likely.
When it is clear that an operation cannot make scheduled payments? It is time to talk to the lender, not on the due date when it is clear that the payment can’t be made. The topics that need to be addressed and considered are
- What is the financial condition now and what are its prospects going forward?
- What is the physical inventory and value of the assets of the operation with realistic numbers at a liquidation value (understanding that a creditor may apply a 50% or greater discount from what Fair Market Value might be on TractorHouse or BigIron to account for the costs of liquidation)?
- What is the tax implication of accelerating sales or the sale of capital assets like equipment and land?
- What is broke in the operation or the conditions that lead us here?
- What can be fixed in the operation?
Those are the broad-based principles that need to be considered. In the application of these questions, the operation should consider the cash flow for each enterprise (grain, livestock. custom work) and identify what operation is stealing revenue and which ones are generating revenue. Interfamily operations should also be examined. Is the operation subsidizing a brother, a child, a parent’s operation intentionally or unintentionally? Consideration to the impact of missing your payment on their ability to continue is critical.
What is a reasonable ask to the creditor? While it is fact intensive and based on the prior performance of the relationship, creditors can make some concessions where it is appropriate. Things like, removal of delinquency fees and interest, re-amortization of debt over a longer period to reduce payments, foregoing collection activity for a set time period or agreeing to allow another creditor to step in “in front of” the creditor to provide operating capital to generate funds to pay the original creditor are all possibilities.
From the creditor’s prospective, they are concerned about ensuring they have their “ducks” in a row regarding financing documents and once they are secured in that regard, they generally seek the best opportunity to achieve the most recovery in the shortest time possible with the least amount of effort and capital spent to recover the asset. Almost always, the creditor will require a release indicating that the borrower isn’t going to receive concessions from the creditor and then turn around and sue them for violations banking law. This is not an indication that the creditor did something wrong, it’s just a wise business practice. Remembering that it is business and not personal is essential to a successful discussion with the creditor.