As
I have gotten older and perhaps wiser, I have realized how little has been
written on this subject that, at least to my mind, is reputable and
trustworthy. Bankruptcy trustees, who are supposed to give someone in trouble
impartial advice, can’t help perhaps but be influenced by the fact that if you
decide to go bankrupt, that’s a new customer for them.
Banks and financial institutions are unlikely to be your friend in need if you
are facing a financial question. They are as likely as not, upon hearing that
you may be in financial trouble, to call your loan immediately—so they can be
first in line to get your remaining financial assets before someone else does
or before you can either fritter the ‘estate’ away or transfer it to someone
else (e.g., a spouse or adult child.)
It
won’t matter to them that if you did, in fact, transfer your assets away within
a year or so of a bankruptcy, this could be considered fraudulent and reversed
by a bankruptcy trustee appointed by a court to organize and supervise your
affairs. They will place you in their ‘special loans’ division—those are scary
people who only care about minimizing the Bank’s loss. When you’re in ‘special
loans’, you’re in a heap of trouble.
There
really is no such thing as ‘Creditor Proofing*’; it’s a misnomer. When people
use the term they are primarily thinking of putting their money in secret
overseas, numbered bank accounts, protected by bank non-disclosure laws in
neutral countries like
(* Every year, the lecture that I give on ‘Creditor Proofing’ in my course at Carleton on Entrepreneurialist Culture seems to be the one lecture that my students ask the most questions about so I figured it was time that I wrote this up as an essay that other might find useful too.)
Neal
Stephenson wrote a ripping good yarn about a group of California-based techies
who work to create an overseas data haven in his novel, The Cryptonimocon. A ‘data haven’ is another
phrase for a pirate bank really; what is money these days but data? If you use
Internet banking today, all you are doing is paying your bills or moving your
money about as binary code—1s and 0s. So a data haven in Stephenson’s imaginary
But
frankly, if you have to resort to this, you are already in trouble and maybe
doubly so. If you throw your lot in with thieves and mercenaries in pirate
nations, you shouldn’t be too surprised when they find a way to rip you off.
And to the people you deal with in whatever nation you live, you will have lost
a lot of their trust and a lot of your credibility too so, no, I don’t think
off shore secret accounts are the right way to do things.
My
late father-in-law, Ken MacMillan, was an old fashioned guy. He thought that
the best way to credit proof yourself was to not have any creditors. He
listened to pitchmen selling mutual funds and laughed. He felt that the stock
market was a mug’s game—only the insiders win. He kept his money in a savings
account in the Bank. He paid all his bills on time. He lived within his means.
He saved money every month. He paid cash for his home and only purchased what
he could afford.
When
Ken passed away, his estate attracted no death duties or terminal tax liability
because he kept all of his money in cash so there was no deemed disposition of
stocks, RRSPs, property (other than his primary residence, which is tax free in
Canada anyway). The Canada Revenue Agency (CRA, the equivalent of the IRS in
the
I
don’t think my father-in-law thought much of me; I was a young smart aleck as
far as he was concerned involved as I was in ‘Big Business’. I had had all the
advantages in life—smart parents who emphasized education, private schooling
and three degrees. Plus I was fortunate to be born in a country like
Yes,
I had it all as far as he was concerned including a great wife (his daughter).
But also I had built first a real estate empire and then a (NHL) hockey
franchise together with a huge land assembly, largely with debt. He was not
impressed.
The
late Harold Shenkman, the Founder of Shenkman Corporation, a very large real estate holding
company in
When
his son, Billy asked me what I was going to do in 1982 when, as a young fellow
I first got into business, I told him I was going to build office buildings.
Billy said he was going into parking lots. I laughed. At the time, parking in
downtown
I
was thinking of my father-in-law, one day in 2000 when I went to my Bank to see
how my mutual funds were doing. I had left $100,000 in cash with the Private
Bank (an arm of the Bank for upscale customers only) in 1995 for them to invest
in their Bank mutual funds for me. Before that I had these particular funds in GICs (Guaranteed Investment Certificates) and some term
deposits. These are not very exciting investments—but the principal amounts are
guaranteed by the Sovereign (i.e.,
I
talked with my private Banker and somehow I seemed to recall that one of the pitches
they had made to me initially was that I would receive a monthly statement
‘every month’ (!) no less, so I would know precisely where I was at. But I
don’t recall ever seeing one
statement in the five years they had control of these funds. When I asked to
see how my portfolio was doing, I got a series of excuses—it will take time to
pull a statement together (that bought them three weeks). I was also told: “You
have to remember that you can’t judge the performance of the Bank’s mutual
funds over a short period of time.” Finally I said: “Walter (not his real
name), I’m not mad, I just want to see a statement.”
Well,
in the greatest bull market in my lifetime and maybe ever (1995-2000), the
Bank’s mutual funds were among the 10% worst-performing mutual funds in
How
do people get in trouble; how do educated people with all the advantages get in
trouble? I am sure that there are an enormous number of Canadians and Americans
(and other nations’ citizens too) who are headed for or are already in dire
financial straights. There is an incredible industry that has evolved to ‘help’
people out of trouble—many of these helpers are dubious in my view but more on
that later.
First,
what are the symptoms that you are in trouble? Yes, you need to self diagnose;
like compulsive gamblers or alcoholics or drug addicts, before you can get
better, you need to know and admit
that you are in trouble.
Here
are a few of the symptoms:
· you do not pay off your
credit card balances every month;
· you receive multiple
applications for other credit cards in the mail and you complete these and get
those cards too;
· you miss payments;
· your bank lines are maxed
out;
· you bounce a few cheques by
mistake;
· you can’t keep track of all
the payments you have to make;
· creditors start calling your
house;
· your spouse goes out to buy
an appliance on OAC (On Approved Credit) and she is rejected because your
credit rating (measured by your Beacon score) has fallen below 650 or 600;
· your bank calls your
personal loans;
· you can’t get another
mortgage on your house;
· your bank wants you to
change your Line of Credit into a term loan so you pay it off and then they
won’t renew it;
· you need to go to private
lenders for loans at much higher than prime lending rates.;
· you can’t get any new
financing at all.
You
get the picture and it isn’t pretty.
Now
what causes this? Well, we have hinted at a few reasons—you have a drinking problem
or a problem with drugs or gambling. I came to realize how bad compulsive
gambling can be when an acquaintance of mine (an Appraiser) told me (proudly)
how he had recently tweaked his business model to make his firm much more
profitable.
As
someone who studies and does research in entrepreneurship with an emphasis on
business models, I was keen to hear how he could transform what is essentially
a pretty simple (and a bit boring) business. I mean appraisal firms basically
send out a bunch of appraisers to assess the value of your property to make
sure it meets the minimum FMV (Fair Market Value) that the Bank needs in order
to get its money back from the QSV (Quick Sale Value) of your property.
So
if a Bank has tentatively approved, say, a home mortgage for you with a LTV
(Loan to Value) ratio of 75% of the FMV, the FMV is the appraised value and not
what you say it is. Basically, if you stop making your payments and the Bank
seizes your property through a Power of Sale notice, they want to be able to
realize the QSV and it had better at least 75% of the FMV otherwise the
appraiser is likely to get sued*. The Bank wants their money back for sure. (In
commercial transactions, the LTV ratio can be a lot lower (often 50%) and the
QSV (basically what the Lender can get for your property in 90 days or less) is
sometimes used in place of the FMV so the lender is ‘doubly’ protected from
loan loss.)
(* By the way, as people found out in the Alberta economic
meltdown of the 1980s after the hated Liberals imposed their National Energy
Program which crumpled their oil industry, you are not off the hook even if you
hand your Bank back the keys to your house. (Thousands of people did this in
So by not dealing with this sort of problem yourself, you may end up worse off—the Bank is selling your home when everyone else is selling, which depresses prices further, (in real estate, you make money by buying low and selling high which is easy to say but hard to do) and you may end up paying for things ‘twice’. First, you have lost the equity in your home and, second, you may still end up paying all of the Bank’s costs anyway. The only way out is to declare bankruptcy (which many of them did) but this could worsen your situation too—more on this later.)
Appraisers
usually get paid $150 to $250 for run-of-the-mill home appraisals.
But
Morris (not his real name) told me he had developed a new specialty—the 24/48
hour ‘rush’ appraisal for $500+, more than twice what he normally gets for a
home appraisal. He told me that he has a special team of elite ‘SWAT’ type
appraisers (a LOL comparison, I thought) who did these rush assignments. Why on
earth I asked him, would anyone need such a thing?
Well,
it turns out that Ottawa-Gatineau has two Casinos; and there are storefront
lenders near these places that lend money to (compulsive) gamblers. These are
not banks; these are openly controlled by criminal elements and their rates of
interest including the vigorish (or ‘vig) are above the legal limit set in
Now,
Morris told me he has a new middle class, middle aged type of client who needs
24/48 hour appraisals because, if you don’t pay these loans back, they don’t
send the Bailiff over to your house to put you and your family out on the road
and take your possessions, they send other types of people—even scarier than
Bank special loans officers or Bailiffs, much scarier. So Morris’ ‘special’
appraisals then are submitted to an American Bank (AB, not the real name of the
institution either) that has set up shop in Ottawa to exclusively offer ‘home
equity’ second mortgage loans of up to $100,000 in less than 24 hours. Their
rates and fees are also atrocious but less than the legal limit and it’s better
to owe AB money than these other people.
OK,
so you’re saying: “It can’t happen to me” or “I don’t have a problem with drugs,
alcohol or gambling”. Well, bully for you.
I
think the number one cause for divorce is none of the above—it’s probably
financial problems. Yes, I know that people say ‘I didn’t love him anymore’ but
I’ll bet the root cause of many marriage breakups is financial stress and not
that you really fell out of love with him. If your kids aren’t getting the
opportunities you want to give them, if creditors are calling you at all hours,
now that’s stressful.
Interestingly,
over 80% of proposals for marriage come from the man asking the woman; the
reverse is true for divorces. Draw your own conclusions.
Paradoxically,
while I believe that the number one root
cause for family breakup is financial stress, I also believe that the number
one reason for financial hardship is marital breakup. It’s a circular argument
but probably true. The nexus of a society is the family; if parents stay
together, it is my belief that this affects, in a positive way, the social well
being and the financial well being of the next two generations. The single largest class of poverty-stricken folks
is single mothers. Need I say more?
Other
obvious causes of financial hardship include: job loss, loss of a business,
insured losses (losses where the insured value is less, often much less, than
the replacement cost—and don’t get me started about the insurance industry*),
loss of markets, loss of a large account, entry by a new competitor, illness, a
change in your marketplace, inability to collect receivables, a default on a
loan owed to you, loss of hope.
(* Former (now deceased) Chief Justice of the Supreme Court of Canada is reputed to have said ‘the insurance industry is one where large companies take advantage of smaller ones and individuals’.)
If a
large client of yours or a large client of your firm goes bankrupt, your
ability or your company’s ability to collect a receivable may drop to nil. The
knock-on effects of this type of event can often be devastating and while, most
of the time, if you want to know who is at fault when you are in financial
difficulties, you just need to look in the mirror, sometimes, the fault is not
yours.
Having
said this, if one of your clients is getting into trouble, you usually have
some inkling about it and you should be taking steps to avoid going broke
yourself by diversifying your client base, for example.
So
in the end, for most of us who face financial difficulties in our lives, the
first thing to do is stop blaming everyone else. It doesn’t matter if someone didn’t
repay that loan you made to him or her; if you can’t collect it, too bad. Get
on with the rest of your life. This brings us to the last cause I mentioned:
loss of hope. Human beings can not
live without hope. If you have lost hope, you will never climb out of debt and
you will never creditor proof yourself.
Many
executives I have met in the
And
for employees, who have been laid off, I have seen many go on to more
productive and happier work lives elsewhere. But I can tell you, I have never
met a
In
the British tradition, personal bankruptcy is a personal disgrace. I don’t
think of it that way, but many people do. However, there are many, many things
you can not do if you have been personally bankrupt which may include: teach
(!), be a member of a police force, have a job where a security clearance is
required*, get a credit card, get a cell phone, visit some countries, be a
Director or Officer of a publicly traded company, become a professional like an
Accountant, buy on credit, get a mortgage and more besides.
(* I suppose you can’t get a security clearance because the concern is that you could easily be bribed to reveal confidential information. When you are in serious debt trouble, or so the thinking goes, you are considered potentially unreliable.)
Now
you may be told that you can skate out of your debts by declaring personal
bankruptcy but that may not be true either. For example, you can not get out of
paying alimony in
You
may be told that you can get a complete discharge from bankruptcy after a few
years or even months and your record will be wiped clean. I believe that is
total bunk; there are data havens that exist where your information will be
kept and your personal bankruptcy will follow you around like a bad disease,
forever.
It
will come up over and over again—it will haunt you the rest of your life.
And
there’s worse. I think if you declare personal bankruptcy, you end up paying
three times. Yes, three times over.
First, you will have to pay the court appointed Bankruptcy Trustee to oversee
and manage your affairs (there, you have a new boss). Second, you will not be
discharged from some of your responsibilities anyway (like say your alimony
payments or the Judge may decide that while you don’t have any assets left, you
have good earning potential. So she or he may decide that some of your future
earnings will be set aside in a pool for your creditors; so, guess what? You
end up paying them back anyway). Thirdly, after your personal bankruptcy, try
getting a telephone hooked up. There are services that exist for people like
this. A residential telephone service for people with bad credit will cost you
twice what you would pay to Telus,
So
when someone tells you, you should declare personal bankruptcy, hold your
horses and, at least, think about it a bit before plunging off that particular
cliff.
Now
I am not counseling anyone to do any particular thing in this essay—I can offer
no advice. But what I can do is at least raise some issues that might help you
consider your options.
I
personally believe that bankruptcy should be an option and should not involve
any preconceived notions that you are a bad person. Everyone can make mistakes.
I believe that everyone deserves a second chance. When I served on the NHL’s
Board of Governors, I believed that the NHL’s drug policy should allow players
a second chance. I believed that any player that came forward and admitted they
had a problem with legal or illegal drugs should get counseling and support
from the League, no questions asked. (Mind you, I also don’t believe in third
chances.)
Imagine
if personal bankruptcy resulted in your execution. How many people would go
into business for themselves? How many people would want to be an entrepreneur?
None. Bankruptcy should be a means of last resort but it should also be a means
to restart your career. I know from a
life of entrepreneurship that we learn far more from our mistakes—so we mustn’t
throw these people away (sure we don’t execute them or send them to the
poorhouse to work in exchange for their debts anymore but we kill them just as
certainly by ruining their credit ratings).
I
wish I could give you a simple recipe that is quick and painless. I don’t think
such a thing exists. But one thing I do know that if you don’t get control of
yourself, you won’t get out of debt.
If
you drink too much, stop doing it. If your health is bad because you smoke like
a fiend, eat too much, eat the wrong type of stuff, take drugs, gamble
excessively, watch too much TV, don’t get any exercise, well, darn it, fix it.
Huh,
you say, how is this related to the fact that you’re in debt up to your
eyeballs? Well, I know if you drink a lot, you are NOT going to be at your peak
and you need peak performance from your body and mind to get out of debt.
I
tell people before they become entrepreneurs to be prepared to work hard, very
hard over a long period of years. There is no substitute for this. Some of my
students read about the guy who sketched a business model on a napkin and sold
his company (which had no revenues and no clients) 18 months later for $120
million USD. Well that is about as likely as you winning the lottery. I tell my
students that you can plan to get rich but you can’t plan on winning the
lottery. So don’t pay any attention to
these types of exceptions—most of us, virtually all of us, who will have any
type of financial success, will do so from concerted effort over considerable
periods of time measured in years or decades.
Terry
Matthews told me that it took him 7 to 12 years to build a great business and
he has done it more than once (Mitel and Newbridge
come to mind). So if it takes Terry 12 years, it will probably take you longer.
Once
you have realized you have a debt problem and you have gotten control of
yourself, what’s next? I suggest the next step is to look at how you can lower
your costs. For a guy like me who has spent most of his entrepreneurship career
on the revenue side of business, this is a latter day conversion. I now realize
that no matter how buoyant your revenues are (either personally or
corporately), if you can’t control your costs, they always rise to exceed your
revenues.
One
chap I know who makes a fabulous living working for a Fortune 100 corporation
got into trouble in the year in which he made the most money of his career.
We’re talking about a person who made more than $40 million in a single
career-best year. How is that possible—well, he and his spouse collect rare
artifacts and they overspent in a number of private auction sales. He ended
that year with a horrendous tax bill, which he couldn’t pay.
So
even if you’re mega-rich, you have to hold down your costs.
Now
for most of us, it means doing some simple things like:
· reducing the number of phone
lines you have,
· having a home office instead
of a plush office downtown,
· doing our own filing instead
of hiring a clerk,
· answering your own phones,
· sending your kids to public school
instead of private school,
· taking a nice
GoTravelDirect.com holiday to an all expenses inclusive resort in the DR for
$899 a person including airfare instead of staying at the Kahala
Mandarin Oriental Hotel in
· visiting a qualified, trusted
Mortgage Broker and renegotiating your home mortgage interest rate,
· visiting a qualified,
trusted Mortgage Broker and increasing your home mortgage in order to pay off
high interest rate credit card balances,
· freezing your credit cards*,
· selling your home and
downsizing,
· turning off lights in your
home,
· lowering the thermostat,
· getting rid of premium cable
services,
· getting rid of cable,
· reducing the number of
dinners out,
· brown bagging your lunch,
· planning your day to become
more efficient with your vehicles,
· buying gas when it’s cheap,
· maintaining your vehicles so
they last longer—doing preventive things like remembering to change the oil
once in a while,
· doing minor house repairs
and routine maintenance yourself,
· etc.
(* A lawyer friend of mine told me that he and his spouse have actually frozen their credit cards in a plastic dish. Every time they want to use one, they have to take the dish out of their freezer and wait for it to unfreeze. This delays their purchase by some hours or as much as a day. By that time, they usually have thought the better of it and return the dish to the freezer. I realize it sounds hokey but it works for them.)
I
am sure you can add a hundred more things to my list but you get the picture.
Note that most of the things on my list will find you doing more for
yourself—so again that means getting up earlier and working longer hours so you
need to be fit. When I talk about fitness, I don’t mean peak fitness like, say,
a Brad Pitt or a Jennifer Anniston must look to. They get $10 to $20 million a
film and their entire job is to look
good. Please, don’t compare yourself to folks like this, you’ll only be
disappointed. I mean lifetime fitness,
which means a little bit of fitness (something that you do and will keep doing
for years and decades), a care about your diet, not too much drinking and so
on. This you CAN do.
Now
the other side of the equation is the revenue side of your life. Some questions
you might ask yourself:
· Can I ask my boss for a
raise?
· Should I look for a higher
paying job?
· Is there anything else I can
sell?
· Should my spouse take a job
outside the home?
· Can I start a business that
will make us more money?
· Should I get a second job?
· Can I add to our income by
doing some consulting?
· Can I make more money by stopping some of the things I am doing
and concentrating on the best opportunities? (My Dad called this ‘supporting
the winners and dumping the losers’.)
There
are usually some things you can do on the revenue side of your life but usually
it is pretty small, at least in the short term. So I typically tell people to
focus first on immediately reducing
their cost structure. Hey, I find that once you get into it, it can really
snowball.
There
is a huge movement in
The
Europeans laugh at us sometimes—they call us the ‘work/pajamas people’. We work
all the time, come home, change into out pajamas, go to sleep, only to do it
all over the next day. That’s it, that’s what most North Americans are doing,
with some mindless TV watching to help us get off to sleep so we can forget
what a misery our lives are.
We
live to work, the Euros work to live. I mean what is the purpose of an economy
anyway—to give us money to educate our kids, to give us the opportunity to do
interesting things and learn interesting things ourselves too? Or is it so we
can work all the time to pay our bills?
Whatever
you do, don’t ignore your creditors—they hate this and will definitely report
you to their credit bureaus, which will kill your credit rating in a hurry
(more on this in a minute). When they phone, be polite, tell them what steps
you are taking to pay them (even if you are late) and then live up to what you
said you would do.
Now
at the end of the day, maybe you just can’t get out from under the heap of
debt. What to do? Well, I have asked you to at least pause before you declare
personal bankruptcy because of the serious consequences that I believe result
from that drastic step.
But
I have found that if you are honest with your creditors, at least some of them
will cut you some slack. In business, your suppliers don’t want to see you
fail—they like having customers to sell to. So, for businesses in trouble, one
of the first places you go to is your suppliers.
Now
this can backfire—they may instantly cut you off. It’s a risk.
When
I was with Terrace Investments Ltd., we had a policy of not kicking our tenants
out when they had a financial problem and not suing them either. We felt we
would get much further ahead by working with our tenants—lowering their rents
by agreement during tough times and getting it back during better times. We
estimated that we saved about 40% of our tenants from the dustbin that way and
we NEVER wasted any time suing bankrupt tenants that went broke—we had better,
more positive and productive things to do than engage in soul-destroying
litigation*.
(* Samuel Adams I think it was who said (and I paraphrase here): “If a man should steal my watch, I shall fight him for it. But if a man should sue me for it, I shall take it off and give it him, glad to have gotten away so cheaply.’)
So
sometimes you can make a proposal yourself to your creditors and have then
accept longer payment terms, lower interest rates or even get their agreement
to take less than face value on your debts.
On
the other hand, some residential landlords when they hear you are in financial
trouble will take immediate punitive steps against you—like try to evict you or
distrain your premises. (The latter is a term you see
more frequently in commercial real estate. Basically, it means that the
Landlord can lock you out of your premises and seize everything inside as
recompense for their unpaid rent.)
I
realize that making a proposal (whether you do it yourself or get expert help
from a recognized, trusted
professional) is risky but I am assuming that you are out of other options. And
you have gathered by now that I believe you are probably better off most of the
time to make your own decisions and handle your own affairs.
And
I have found that if you are honest with people, most of them will cut you some
slack. When I started out in business in 1982, a smart lawyer by the name of
Kent Plumley told me that the most valuable thing in
business was your reputation. I didn’t really get it then but I sure do now. If
you have a good reputation, people will hire you, buy from you, sell to you
and, when you get in trouble, help you as best they can. I believe that the
number one thing in life is not love;
it’s trust.
Still, I have known Banks that just get a whiff of trouble and they’ll pull the trigger on your loans (they ‘call’ your loan, i.e., demand immediate payment in full) even though you may not have even missed a payment. They do this so they can be first in line to grab what they can from your estate (a bankruptcy estate is not the same as the estate you leave on your passing but I can see how sometimes it feels that way). They absolutely shouldn’t do this but if you look at most of the personal Bank lines of credit agreements and other types of debt agreements, the Banks usually have a lot of weasel words in there that pretty much allow them to do what they want.
When
you have a big debt problem, one of the things you can try to do is a debt
consolidation. This can be done informally (like when you re-mortgage your
house to pay off your credit cards) or formally through a proposal to creditors
(which you will need legal and professional help to do).
The
latter is a kind of delaying tactic—you are trying to feed an elephant but only
one peanut at a time.
Remember
that you must change things—whatever you have been doing, it isn’t working. I
can’t tell you how many people seem to be frozen in the headlights when they
see a debt problem coming at them but refuse to change what they are doing*.
You must act.
(*It is the definition of insanity to repeat the same things over and over again and expect a different result,” Anon.)
Fight
it, especially if it’s personal bankruptcy. I believe that it is hard and maybe
even impossible to fully recover from personal bankruptcy. If a vindictive
creditor just wants to hurt you, they may try to petition you into bankruptcy.
You don’t have to accept that.
This
will be a court proceeding and you will need a lawyer but you should appear and argue against this if you can. I believe that
most judges will be somewhat sympathetic to someone who wants to repay his or her debts; is making efforts to do so and
wants to avoid the stigma of personal (or corporate) bankruptcy.
I
have also found that meeting face to face with your most difficult creditors is
generally a good idea—they see that you are not such a bad person after all.
They will see your pain up close. You are far more likely to work out a deal if
you can get an in-person meeting than if you have your lawyer talk to their
lawyer. In most cases, their lawyer doesn’t want to settle anything. They make
money by dragging the case on and on—lawyers usually get paid even if no one
else does*.
(* I find it frankly incredible that NHL owners and NHLPA members are allowing two lawyers to attempt to resolve the current labour dispute that is on-going as I write this. Both Gary Bettman and Bob Goodenow are well trained, combative lawyers and, if I was ever in a jam, I could do a lot worse than having either of these two men defend me. But I can’t imagine how the League and its Player Association will ever come to terms unless League owners and Players sit at the table along with Bettman and Goodenow.)
I
have seen hardhearted creditors melt in these kinds of meetings. It also gives
you an opportunity or your lawyer an opportunity to tell them that even if they
got a judgment against you (which you will defend), they still have to enforce
it and that may not be easy. A lot of people don’t know that just because they
have won a court case and have a judgment against you, they might not actually
receive anything for it. A judgment can be appealed. A judgment that is upheld
must be enforced. First, there will be a debtor- creditor examination to see if
the debtor has any assets left. Then, the creditor has to find a means to
collect on his or her judgment—the Government and the Courts won’t do that for
them—they are on their own. So an expensive court proceeding that can take
years may be worthless even if they win. Much better to get the cooperation of
the debtor who might be able to make at least partial restitution. And that
restitution might not be in the form of cash or assets—it could be in the form
of services. You could work for them!
A
friend of mine called me up a few years ago in tears. Kevin (not his real name)
was incredibly upset—the Bankruptcy Trustee (called in by his Bank
unexpectedly) had just entered his premises and was in the process of taking
over his business and his files. His Bank had told him that they would give him
notice if they were going to do anything precipitous. They didn’t but I can
understand why most of the Special Loans Bank officers don’t want to give
people like Kevin any notice—they are afraid of last minute fraudulent
transactions to remove assets or cash from the business.
But
Kevin wasn’t like that; he was still working hard to save what had been a very
successful financial services company. The Company was knocked over by a single
(large) transaction that had gone south. Many good businesses are ruined by they
themselves not being able to collect their receivables.
Kevin
asked me: “What do I do? They’re at my door asking me all sorts of questions,
demanding answers from me right away!”
“The
first thing you do, Kev,” I answered, “ is nothing at
all. I want you tell them the (smart) truth*. Tell them you’re very upset right
now (which is true) and you will fully cooperate with them. Tell them you’re
sick about what has happened but that you have to go home right now. Then just take your personal effects and leave
immediately.”
(* I learned from another clever lawyer, Scott MacLean that one must always tell the truth but it must be the smart truth. No one expects the truth anymore in our media saturated society. The smart truth keeps you out of trouble. The truth hangs you. How you say things makes a huge difference. Here is an example—Coke came out with a vending machine a few years ago that adjusted soda prices when the weather changed. They also came out with a media release that basically said ‘we have invented a vending machine that raises soda prices when it gets hot.’ You can imagine how that went over: ‘large company denies thirsty customers on hot days’. The smart truth would have been to say: ‘we have invented a vending machine that lowers prices on cold days’. Same thing but completely different result. The spin on this would have been: ‘Company cuts customers a break on cold days’. Coke’s new vending machine has never been rolled out.)
One
thing that happens in our society when things go wrong is that we always want
to find someone to blame. And that someone is you. I told Kevin to call me from
home. Here is what I told him the next steps should be:
· Call the Trustee the next day and arrange for him to send you
a list of questions that he needs help with.
· Take the initiative.
· Offer to help.
· However, never answer their
questions off the top of your head.
· They have done this dozens,
maybe hundreds of times and they know how to think around corners. You have
done this (hopefully) never. Therefore, it is a very unequal playing field and
likely to result in a very unequal result.
· Remind yourself that they
are not your friends.
· Remind yourself that they
may be trying to trap you into saying things that incriminate you even though
you have done nothing wrong.
· Answer their questions on
paper first. Then sit on your answers for at least 24 hours.
· Read them again. See if they
still make sense.
· If you can’t handle it
yourself, get a lawyer.
· Don’t get bullied or rushed
into premature answers. Tell them you’re trying as hard as you can to get all
the info they need.
· Start by giving them
something innocuous to show that you are cooperating and this will buy you some
time.
· Remember what happened to
Patty Hearst—she not only got captured by the Symbionese
Liberation Army, she was brainwashed into becoming a gang member. This is known
as the Stockholm Syndrome, which means that any of us can be forced to do
things we would normally abhor if we are under sufficient duress.
· If people keep telling you,
you are a bad person, you may eventually come to agree with them even if you
did nothing wrong. (This entire essay is based on the fact that you are a
trustworthy person trying to get ahead honestly in the world but, like everyone
else on the planet, you make mistakes of omission.)
· This is what Crown Attorneys
(District Attorneys in the
· You would be surprised what
people will admit to—even things they did not do just to get them to stop.
· You never let people like
this put words into your mouth. Don’t repeat bait words like: “Isn’t it true
Mr. Smith that you paid bribes to City officials to get your permits released?”
You don’t answer: “I never paid bribes” because the next question will be:
“Well, Mr. Smith, if you don’t like the word ‘bribe’, what word would you use?”
You can see where this might take you. The smart answer is: “We have records
and invoices from the City for all of the costs for our building permits.” The
word ‘bribe’ never passes your lips.
· Remember the ‘pen is a long
arm from the grave’. Never write anything down that you would not feel
comfortable seeing on the FRONT page of your local newspaper.
· This goes for email too.
· Especially for email.
I
also talked to Kevin about some other stuff too. I told him that I would allow
him to feel sorry for himself for three days. The first day, you are allowed to
drink some wine or whatever and wallow in self-pity. The second day, try to get
some extra rest. The third day, I want you to get some exercise. By the fourth
day, apart from trying to deal with the fallout from your company’s bankruptcy
(which can go on for years and you are just going to have to learn to live
with), I want you to start planning your new future.
Now
if you owe money to the IRS or CRA (in
With
a judgment against you, they now have the power to ruin your credit rating, to
send a bailiff in without notice to take your stuff, to garnishee your wages
from your employer, to seize any property you have and much more.
If
you credit rating is torpedoed, you’re sunk. Your spouse won’t be able to go
get that new tool he wanted or the new fridge she wanted OAC (On Approved
Credit) because your Beacon Score (how most credit agencies rate you) has
fallen too low.
Credit
bureaus are hugely powerful—they keep track of all your credit cards, your
mortgages, your Bank debt and much more. Privacy in
Anyone
who is a member of a credit bureau can request your credit history (called a
credit report) and they are going to know a lot about you. Did you know that
just the number of requests that are made on your credit rating lowers your
Beacon Score*? So if you just sold your condo and your old car to move your
family into a new home, buy a new washer and dryer, a new fridge, a new car,
some curtains and some other nice stuff OAC or if you approached a few Banks
for a mortgage (and each of them will query your credit report), your Beacon
Score just took a big hit. Huh? What’s with that? Isn’t that what the big box
stores, the car dealers, the Banks, the Government want you to do? Isn’t that
what your Mom and Dad told you to do when you grew up—be responsible, get a
house in the suburbs, have a couple of kids, drive a nice car?
And
your credit rating goes down! What a …. (I can’t say it in polite company.)
(* Every time someone ‘pings’ your credit report, your Beacon Score will go down by 3 points. If you have a lot of involvements (e.g., you are an entrepreneur with fingers in a lot of pies and you are busy starting new ventures, developing new technology and new ways of doing things, building new facilities, creating lots of jobs—i.e., doing the things that entrepreneurs should be doing), then there could be many requests for a credit report on you. Every time you do a new financing, your credit rating could go down. Not only is this unfair, it actively works against society’s best interests as well as the individual’s. This practice should stop, in my opinion.)
Now
if your credit rating goes down, everything becomes more expensive—you can’t
take advantage of that don’t pay a cent event until…. No interest until…. You
have to pay cash for everything or if you borrow money, it will at a higher
interest rate.
Ken
MacMillan was right all along. If you can manage it, don’t borrow money and
live within your means.
Having
said this, you have the absolute right to demand from each credit bureau (there
are two main ones in
It
takes a huge effort to get the credit bureaus to change something that is out
of date or is wrong but you must be persistent. A bad credit report is a career
killer and a business killer.
So
monitor your credit report and do things that will improve your Beacon Score
like retire your credit cards, pay off your back taxes, etc*. Your score will
go up over time as you gain control over your financial life.
(* To give you a sense of how important this is, a friend of mine who works for a major Bank in Canada tells me: “I have witnessed how quickly the Bank will terminate credit products if the client is deemed to be too high risk—even if they have made ALL of their minimum payments. Working there, I have also seen first hand how difficult life can be for people who have declared bankruptcy or those who have unsatisfactory credit history.”
Banks have any number of ways they can ruin your credit rating. One of the most abusive I have ever heard of was brought to my attention by a Small Business Owner—he called me in some distress to tell me that a crucial order for materials had been derailed when his cheque was returned to his supplier, NSF (Not Sufficient Funds). He couldn’t believe it. I had just helped him sell a piece of real estate he owned. The net proceeds from that sale were to be used to expand his business. He had received a certified cheque from his law firm’s trust account drawn on a major Canadian Chartered Bank.
Now a certified cheque in
(It is actually against the laws of
I think that every city economy (which is really a
city-state in the sense that, for most people these days, your economic well
being is probably far more tied to how well your local economy is doing than
the national or global economy) has a certain ‘speed limit’ attached to it.
That is, the maximum speed at which a local economy can move is limited by many
local factors such as how fast your lawyer moves, how fast your local financial
institutions react to your requests for financing, how fast your customers make
up their minds, how fast your suppliers can move, etc. My perception is that
business moves a lot faster in Hong Kong, NYC and
Back to Paul’s (not his real name) story, his Bank had put a hold on his deposit for ten days while the certified cheque ‘cleared’. I was flabbergasted and offered to call his Bank for him right away. I spoke with the Branch Manager. I told her: “This is highly unethical and might even be illegal. How can you do this to Paul? On what basis have you put a hold on a certified cheque issued by one of our largest, most prestigious law firms and a major Canadian Chartered Bank? What are your concerns? Have you done this to other SMEE clients? Is this a policy of your Bank? What are you going to do to make it up to Paul?”
She agreed to release the funds immediately but did nothing else. Paul had to make amends with his supplier and he was lucky that he wasn’t reported by his supplier to the credit bureaus. Passing NSF cheques is a big no-no but it can happen to anyone.
I was pretty sure that this was an isolated incident until two more SMEEs told me the same thing happened to them. This is atrocious behaviour on the part of Canadian Banks.)
Even
if you have bad credit, over time you can rehab your rating. I tell my students
to absolutely not declare personal bankruptcy when they graduate because they
have way too much student debt but sometimes, it happens. I may not see them
until years later when they are starting their own businesses and have not
awoken to the fact that they have bad credit and can’t get say supplier credit.
This
is not good.
So
I tell them to re-establish their credit by taking some small steps in that
direction. For example, I tell them to get a credit card (yes, I really do) but
one with a really low limit. And then use it from time to time on absolute
essentials and pay off the full balance every month.
Credit
card companies may allow someone with bad credit to have a credit card by
establishing a cash collateral account and clearing the card regularly. For
example, a friend of mine who recently went through a formal, court-monitored
proposal to her creditors managed to keep one of her credit cards by informing
her Bank in advance of the filing.
They agreed to allow her to keep one card with a $3,500 limit, which they
cleared every Thursday against a cash collateral account that she maintained at
$5,000.
She
is a high earning professional who had made some terrible investment choices.
She travels a lot in her business and, for her, a credit card is an essential
tool.
It
takes time but you can rebuild your reputation
I
also teach in the
A
mortgage can be a form of useful debt—it allows you to buy a home sooner and is
a form of forced savings. I ask my students how many of you can save $700 a
month. Not many put up their hands. I ask how many of them can afford to pay
$700 a month in rent. Most of them can manage this.
Well
part of every month’s blended mortgage payment is going to pay off the
principal and this will add up over time to a mortgage-free home. So let’s say
that an average of $700 a month went into principal repayments over a five-year
period, that’s $42,000 ‘saved’. Now most of us, if we had this in a bank
account somewhere, would find ways to spend this money but because it is locked
into bricks and mortar, we generally keep it.
Home
equity is the most important form of savings we typically tend to have—it is
easily accessed if we get into a jam by re-mortgaging the home and, around the
world, it is the single most important source of capital for new business
formation (far, far more important than Venture Capital).
Also,
there is a little understood but important wealth effect that comes from paying
off a home mortgage—it is called imputed rent. If you own a home free and
clear, you are much better off than because of this (at least in
The
way to understand imputed rent is as follows:
1. You own a home free and
clear.
2. You decide to move out and
rent your home out for $2,000 per month.
3. But you need to live
somewhere, so you rent a comparable home for $2,000 per month.
4. Your former principal
residence (now a rental property) is producing income for you and let’s just
assume you net $24k a year (i.e., your costs are zero).
5. However, you are in the 50%
marginal tax bracket, so you have to send CRA half of this amount—you are left
with $12k after tax.
6. But you are paying rent of
$24k a year to your Landlord so you are out $12,000 in CASH.
7. Therefore, you are $12,000
better off staying in your principal residence. This is a very real effect* if
somewhat hard to grasp.
(*
So
buying your own home using a mortgage is likely to be a good idea for most
people—not all debt is bad. But buying a NHL hockey team with debt is probably
a bad idea*.
(* One of the first things that new Commissioner
I
have already said that, in my view, you don’t protect your family by hiding
your assets on
So
you are completely free to arrange your affairs in a way that is efficient and
effective, as long as it is legal and simple and meets GAAP (Generally Accepted
Accounting Principles). The legal and GAAP part, I will largely leave to you to
figure out (with help from professional lawyers and accountants). The simple
part needs more elaboration.
I
always laugh when I read in the media that people (i.e., NHL Owners) are buying
their teams for tax loss purposes. NO ONE SHOULD EVER BUY ANY BUSINESS TO LOSE
MONEY.
I
think we waste an incredible amount of resources and time, trying to figure out
ever more complex schemes to avoid paying taxes—this is called financial
engineering. Every financial engineer I have ever known eventually went
bankrupt. They engineer such incredibly complex transactions that eventually no
one really knows what is going on. Human beings constantly overestimate their
intelligence and complexity is the enemy of success.
So
rule number one—keep your affairs simple. The best way we have yet discovered
to hold assets for long periods of time is the LLC—Limited Liability Company*.
Apart from a few institutions that are bound together by ‘other directed’ means
(like the Holy Roman Catholic Church, The Emperor of Japan or the House of
Windsor), the longest lived organizations on the planet are incorporated
companies.
(* Most of my students think that a LLC is just that—it
totally limits your personal liability. It does put some limits on your
personal liability but it is not a 100% guarantee. Your company’s creditors can,
in certain circumstances, breech the wall of limited liability. In