Perhaps you pay for your auto, mortgage, home equity, equipment, and other loans each month through your bank’s online portal or app. In these cases, you select which account is receiving the transfer, and there’s a digital record showing where the payment was applied.

Not every farmer does this, as many prefer to mail or hand-deliver payments to their bank or lender. And even tech-savvy producers run into situations where they have no contact with money going directly to their lender—for instance, the proceeds of an auction or sale that are sent directly to the lender.

One of our clients was a farmer who sold some equipment at auction. Notably, he still had an active loan with his bank on one piece of equipment, which a family member had helped secure by signing a guaranty that he would assume the debt if the primary debtor—our client—could not pay. Rather than the farmer receiving the sale proceeds and turning them over to the bank, the auctioneer remitted directly to his bank.

Instead of applying this payment as expected to the equipment loan, however, the bank put it toward another of our client’s loans. He learned about this a short time later when the family-member guarantor received a letter from the bank advising that a payment had been missed on the still-open equipment loan and that he, the guarantor, was financially responsible.

We spoke with the bank and its attorney and, after some discussion, fortunately the bank agreed to reapply the auction proceeds to close out the equipment loan instead, and we did not need to take the matter to court. We were thankful our client had a good outcome, but it wasn’t guaranteed—and the entire problem could have easily been prevented.

Be clear about intent

To avoid this, we advise clients and auction sellers to write the specific loan number(s) on the payment checks to lenders or note it in correspondence before or with the payment being transmitted to the lender. It’s also a good idea for the client-debtor to contact the bank and explicitly state which loan should receive payment and then follow up to ensure it happened.

The fact is, if you have more than one loan with a bank, credit union, or other lending institution and you don’t specify where a payment should be applied, under Iowa law the lender can apply it where the lender prefers. If Grandma signed a guaranty to help you buy a combine but you also have a mortgage only in your name and its payment deadline is looming, the bank may decide to allocate your payment to the mortgage. It is a larger loan, for one; and two, bank officials figure they can always go to your guarantor if further payment doesn’t materialize. They are going to look out for their financial interest first and foremost—especially if you the borrower are having money troubles

If you can put your request for allocation of payment in writing, do so. Although oral contracts and instructions have the same weight as written ones, it’s much easier to point to something in writing than to try to resurrect a verbal discussion. If you must make a payment and instructions by phone, get an email address so you can follow up with a note reiterating where you want payment applied, with the loan number.

You can also write a restrictive endorsement on a check made out to you, that you’re signing over to the lender. This just means on the endorsement line on the back where you would normally write, “For deposit only,” write, “To be applied to loan #…” and substitute your loan number for the ellipses. It’s a good idea to check if the lender prefers specific wording for this type of endorsement—they should interpret what you write reasonably, but it’s easier for everyone if you use the language that triggers the lender to do what you want.

If you write a check for payment instead, include the loan number(s) in the Memo line.

Remember: You have the right to direct how payments are applied to your loans. It’s your money, and while the lender might have its own preferences about how to apply payments, you have the right to control how your money is used. If a lender refuses to allocate a payment as you direct, you should seek legal advice if talking with the lender doesn’t resolve the issue.

And if you are close to a financial cliff—facing mounting debt, about to fall behind on payments, or experiencing a shortfall of expected income—Ag & Business Legal Strategies can also help with the larger decision about whether to pursue debt restructuring or bankruptcy. Our attorneys can additionally assist with delving into your farm’s financial health with an enterprise analysis.

As our Founding Attorney Joe Peiffer often says, a decision to do nothing is a decision to let others decide for you. Don’t wait until things go from bad to worse to seek legal counsel!

(319) 393-1641

At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our team will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.

Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow, when it may be too late.