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How to Fix a Troubled Farm Loan

Here are 6 tips for dealing with your lender.

Attorney Clint Cutler grew up on an Iowa farm and watched his father struggle with finances during the 1980s farm crisis. Today he practices in the areas of debtor/creditor law, bankruptcy, and commercial litigation for the Minneapolis business law firm Fredrikson & Byron.

Cutler has fielded calls recently from crop producers who haven’t had profitability in their operations for a few years and are not generating enough money to be able to pay back loans. “The big question is whether we’re going to see a pullback by lenders in terms of supplying the operating loan for the year,” he says.

Cutler gives these six tips for dealing with your lender on a loan workout:

1. Be honest and realistic in assessing the situation. 

Consider the underlying problem and what can be done to change the situation. For example, if the problem is low commodity prices for corn and soybeans, can you diversify to other crops or reduce operations to reduce or eliminate losses?

2. Try to understand the problem from the lender’s perspective. 

Lenders are in the business of making loans and collecting payments on those loans – not foreclosing. But if forced to do so, most lenders are prepared to foreclose to collect on a troubled loan. Some lenders like commercial banks are highly regulated and may be constrained in terms of ability to continue to lend to a producer who is in default on its loan. Most lenders have a different risk assessment than producers about what the future will bring.

3. Assess strengths and weaknesses of your position and the lender’s position. 

Most lenders obtained financial statements from the producer and appraisals on assets when making the initial loan. Consider updating both to determine how much the lender could obtain if it forecloses and compare that to what you are offering. Would the lender suffer a loss on the loan if it forecloses? Foreclosure sales can trigger taxable gains. What is the effect on you if there is a foreclosure? Is it possible for you to refinance the loan elsewhere or enhance the credit with guarantees or additional collateral?

4. Consider alternatives to the restructure for you and the lender. 

Are there alternative lending sources who could replace the existing lender? Consider what could be done in a bankruptcy reorganization. No one wants to file for bankruptcy relief, but understanding how a bankruptcy might work for you is a backdrop to many successful restructuring negotiations. For example, it might be possible to restructure a loan over the objection of the lender in bankruptcy. That possibility may induce the lender to negotiate a restructure to avoid a bankruptcy filing.

5. Consult with trusted advisers or professionals with experience.

No one sets out to fail to pay a loan back, but when a loan is in trouble, you may be in uncharted waters. Professionals who represent producers in restructuring have been through those waters before and can provide valuable insights.

6. Know your rights. 

The lending documents constitute a contract between the lender and the producer. Know your rights under the documents. In addition, state laws may provide protections or rights to producers in foreclosure, such as mandatory mediation before foreclosure, rights to redeem from a foreclosure sale, and the like.

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