Should I co-sign an agricultural loan?

Editor’s note: This information is provided for educational purposes and does not constitute legal advice.

Parents co-signing loans for their children is a common practice in agriculture. This usually happens when the child needs a loan to buy land, livestock or agricultural equipment.

Lenders are generally more willing to grant the loan to a beginning producer if the parents co-sign. This means that the parents promise to repay the loan if the young producer cannot. Parents have been doing it for decades to help their children get into farming.

If the child proves to be an effective manager, the risk of the parents being liable for the outstanding loan balance is quite manageable.

Another scenario

There is another situation where parents can be asked to co-sign or guarantee payment of a child’s debt — when the young producer cannot repay his loan. That may be the case today for some growers in Nebraska, given today’s high input costs and fluctuating crop prices.

Lenders may require the borrower to provide additional loan security, such as debt-free land, livestock, or equipment. Asking for a loan guarantee from a relative is another common way to provide additional security for loan repayment, especially when the borrower does not have additional assets to pledge as collateral for the loan.

Securing the loan guarantee from the young producer’s parents often ends up being a late step in the ultimate process of securing the loan, as illustrated by a 1987 Nebraska Supreme Court case (226 Neb. 314).

In May 1983, the lender advised the son that he would need the father’s security on the son’s operating loan to continue the loan. The amount owed was more than $120,000 and the son’s net worth was less than $500. The father signed the guarantee and the lender continued with the loan.

Five months later, in November 1983, the lender canceled the loan because the son could not pay the full balance owing. After the son’s property was sold, the father paid over $75,000 to cover the outstanding balance. If dad hadn’t co-signed, the lender probably would have started the foreclosure in May, perhaps with an outstanding balance, and dad would have kept his $75,000.

The family should consider the parental loan co-signing request as the potential start of the loan foreclosure process. You should consult a lawyer and explore bankruptcy and non-bankruptcy options, including farm debt mediation. (Call the Nebraska Rural Response Hotline at 800-464-0258 for more information.) You must develop a debt relief plan, which co-signing the loan can be part of.

4 considerations

Here are some things to consider before signing a loan guarantee for a heavily indebted family member:

1. Will loan co-signing work? Ask an outside financial analyst for advice on whether the deal can be put on a solid financial footing quickly and whether co-signing the loan will help you in this process. If the answer to either question is no, see #4.

2. Cap the amount of the loan guarantee. You don’t want unlimited liability, so set the maximum amount you will be liable for.

3. Find out from the lender how much debt repayment is needed this year and in subsequent years so that the lender can continue to finance its operations. If the family member has to pay it all off in a year, that’s unlikely to happen unless you believe in miracles (see #1). The lender might agree to accept the borrower to reduce the debt to a manageable level over a period of several years (say five years), in order to get the parent(s) to co-sign the loan.

4. Can you afford to lose the loan guarantee amount (see #2)? If you can’t afford to lose the money (and unfortunately, it’s more likely than not that you will), then you can’t afford to sign the loan guarantee.

It’s a very difficult situation — no one wants to be part of the loss of the family farm or ranch. You should probably approach this situation as debt relief and have an experienced attorney negotiate a multi-year relief agreement as part of the loan co-signing process.

This way, the lender and the farm family will know what debt repayment conditions must be met each year to avoid loan foreclosure. If the loan guarantee isn’t part of a financial recovery plan that has at least a chance of success, don’t sign the guarantee unless you absolutely don’t need the money for your own retirement.

Aiken is a specialist in agriculture and water law at the University of Nebraska-Lincoln.

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