Today’s economy is leading many families and small business owners to make some difficult financial decisions.

Farm families and businesses are certainly not immune to this issue, particularly those in the dairy and livestock sectors. If you are finding that your income is not sufficient to pay all of your monthly bills, then you need to take action now to make the best possible decisions in the months ahead.

First and foremost, you do have a legal obligation to pay all of your creditors, in spite of what you might hear on the radio or late-night television about debt forgiveness programs. Be very wary of anyone who says that they can have your debts forgiven on your behalf.

Analyze your situation and determine how long you would expect the current situation to last, if possible. Do you expect income to improve, and if so, when? This information will help you develop your strategy during the time period when you do not have sufficient income, and whether or not “drastic” measures may be necessary.

Communicate with the folks to whom you owe money. Determine what penalties might exist for late or partial payments. Some creditors might be willing to negotiate payment terms, particularly if you can provide a reasonable estimate of how long you expect to be short and can show a plan to repay once your income increases. Determin the minimum payment necessary to continue to do business with each of your creditors and lenders.

In the event that after discussing options with your creditors you determine that you still will not be able to meet all of your minimum obligations, then you should prioritize your debts. Take care of the essential family needs first, such as food, health, shelter and utilities. (Note: I do not consider cable television to be a utility... this is an entertainment expense. The essentials include only bare-bones expenses necessary for family survival.). After family needs are met, determine which debts relate to items most critical to the business. Go through your bills and ask yourself and your business partners what would happen if the item for which you owe the money for was no longer available to you.

Full or partial farm liquidation may be the only viable solution for paying off debts for many farms. There are several important considerations that need to be taken into account when deciding to sell farm assets. Tax obligations following a liquidation of assets can be substantial. These include both capital gains taxes from the sale of assets and income from sale of inventories.

If you are considering liquidation of your farm, you should consult with a certified public accountant that is familiar with farm tax laws. You should involve an appraiser or the auctioneer you plan to use in the conversations to develop a best-guess estimate of sale proceeds prior to the sale, so that your accountant can help you determine your best tax management strategy ahead of time. After the sale, be sure to set aside in a savings account the amount of cash that you estimate you will need to pay your taxes in April. Also be sure to discuss with your accountant options for spreading your sale income over multiple tax years and if a like-kind exchange is a viable option for your situation. Remember that spending a little bit of money on good advice now can save you much more money down the road.

Another option for farmers that are facing excessive debts may be bankruptcy protection. Many farmers refuse to consider bankruptcy as an option, as there is a perceived stigma associated with filing bankruptcy among those in the farm community. However, this is a practical legal option for farmers. In fact, there is a specific section of the bankruptcy tax code specifically designed for farm owners. Bankruptcy can allow younger farmers who still have many productive years ahead of them to start fresh following a financial disaster. In the long run, a business that successfully goes through a bankruptcy and rebuilds a viable business will have a much more positive impact on the health of the local agricultural economy than the farm that chooses to liquidate and cease operating. And of course, the advice of a qualified tax accountant and attorney will be critical during the bankruptcy process.

Finally, remember during this difficult economy that you are not alone. Many others are going through the same thing that you are and are facing the same difficult decisions as you. Do not ignore your financial difficulties... they will not go away on their own. Open communication with your creditors and others with whom you do business is critical during a downturn. Many farm businesses and even agricultural suppliers are in “survival” mode right now. Do what you can to ensure that your business will survive the bad economy by making sound financial decisions today. PD

—Excerpts from Penn State Dairy Focus newsletter, December 2009

Keith Dickinson is an extension educator withPenn State. Email Keith Dickinson.