3 measures to deal with severe farm debt

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Last week, we discussed some of the ways to manage farm liabilities during stressful times. In this final installment related to financial stress, we provide some ways to manage your assets.

1Liquidate cash and investments to reduce debt
This strategy involves the use of cash and financial reserves that have been maintained in the business to reduce the debt load. But most farm businesses do not maintain substantial cash or liquid asset positions, so this strategy is typically not always a realistic option.

2Sell inventory and pay down debt
Some farms may have accumulated substantial inventories of livestock or grain. Although selling inventories when prices are still going up may not seem attractive, it may be a reasonable option, particularly if the stress is severe, and to alleviate the storage and other costs of maintaining the inventory. However, the money received from liquidating inventories that you produced will often be taxed at ordinary income tax rates, unless expenses or deductions are available elsewhere, to offset your taxable income.

3Sell capital assets and reduce debt
Selling capital assets such as land, machinery and equipment could be a good strategy, when those assets are selling at favorable prices. But remember, this strategy will also likely reduce the long-term income generating capacity of the farm. Always consider the tax consequences of any sale.

Conclusion

The best strategy is to resolve financial stress problems before they become severe. One of the most important rules of managing your farm during times of financial stress is to recognize it early, so you can take action and work toward a resolution. Work with your lenders and keep all parties involved with the process.

Sources: Purdue Extension.

(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)

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