SURVIVING A FINANCIAL CRISIS

Let‘s face the facts. Not everyone’s portfolio safely and consistently goes up and up, never having setbacks or cash flow problems. The reality is, that a sudden change in the economy can play havoc with long term investment plans. And, unplanned business challenges, or new irresistible opportunities, can throw you for a loop.

Even the best planners can, and will, experience financial setbacks. But the strong tend to survive over the long term. Generally, a hallmark of most successful people is that they have experienced more than one setback in their life on the path to financial success.

USING LEVERAGE

Before the Industrial Age, it was very unusual for an individual to owe money to more than one creditor. Multiple creditors simply did not exist. The laws over the centuries have changed so that debtors could no longer be forced into prison for unpaid debts. Then, slowly, laws were passed to allow an individual to start over again if he got too heavily into debt.

Today, you use credit and borrowed money to improve the quality of your life and move up the social and economic ladder. Countless numbers of successful businesses, and great fortunes, have been made with borrowed money.

By using leverage, it allows you to reach beyond your financial abilities to seize the dreams that might otherwise elude you. This is good business sense, as long as debt is used wisely and does not become a cash-flow trap.

What happens if you cannot repay borrowed money or repay the interest amounts? At least thank goodness, you no longer need to worry about debtor’s prison.

LEVELING THE PLAYING FIELD

While creditors have rights, so do you, under a multitude of Federal and State Statutory provisions. For example, the Fair Debt Collection Practices Act, Fair Credit Reporting Act, the Fair Credit Billing Act, the Truth in Lending Act, the Equal Credit Opportunity Act and an untold number of state laws, are designed to level the playing field, so that your creditors deal with you fairly and truthfully. If not, you have legal recourse against them. Even the IRS has come under Congressional scrutiny to be kinder and gentler in dealing with you as a result of the Taxpayer Bill of Rights

There are alternatives to filing bankruptcy and losing everything. Bankruptcy Chapters 7 and 13 (and in certain circumstances Chapters 11 & 12) offer a debtor the possibility of retaining certain property that was used to secure a loan. Mortgage lenders are given preferred status in a bankruptcy.

Most states permit a person filing bankruptcy to retain a part of home ownership. As you will see, this right in protecting your home, what is called "homestead rights", varies greatly from state to state so that your place of residence can become critical if you run into financial problems.

ALTERNATIVES TO BANKRUPTCY

Keep in mind that if you believe that you can repay your debts over three to five years and maintain a reasonable lifestyle, bankruptcy may not be the best for you. Simply trying to renegotiate a "work-out period" with your creditors may be the simplest and easiest solution. Remember, if you owe someone a little money, you have a problem; but if you owe your creditors lots of money, they have a problem.

See if there is a method for you to help them solve their problem, as well as yours.

Try to get your creditors to settle for less. Initial contacts by telephone are often best. You can lay the framework for further discussions and feel out how they might respond. Keep an open line of communication and always be truthful. This doesn’t mean that you need to wear your heart on your sleeve or give away your strategies, but if you want them to work with you, you must be credible and believable.

Meeting with your creditors face to face, particularly your largest ones, is often essential. Explain how you have built a strong relationship with them in the past and how you look to further that relationship. Explain in simple terms what went wrong. Importantly, present them with a well thought out game plan as to how you intend to correct the situation, and why you believe you will succeed.

SELL YOURSELF

Most importantly, always negotiate from a position of strength. You must be in control, not them. Approach your creditor with a win-win situation. Convey the attitude that you can, and will, do whatever is necessary to meet your obligations, and that you are prepared to take any and all action to meet your commitments. And whatever you do, do not be derailed by the creditor that at first appears to refuse to make concessions about your obligations.

Your attitude should clearly convey confidence in your plan, even though you cannot presently meet your commitments. Explain how it is in the best interest of both parties to be cooperative and resolve matters together. Thoroughly review and explain how your plan will work, and how they will benefit. Be sure the creditor understands what it is you can do today, and what things will occur in the future. Be specific. At a minimum, make small commitments and keep them.

SEEK ALTERNATIVES

Another suggestion is to solicit your creditor’s advice. See what options they believe that they can assist you with. Local bankers and creditors in a community appreciate the honesty and opportunity to build long lasting relationships, and they will often respect you honestly soliciting their help. Don’t whine. Demonstrate your abilities, and show them that you seek an opportunity to work with them and keep them part of your team.

Regardless of the lack of success during your first discussions with your lenders, be prepared to go back again and again. Always leave the door open. The creditor may have a change of heart when they see your persistence. Or better yet, if the lender eventually sees that they stand to gain more by cooperating with you, this may bring them around in due time. Express your disappointment on not resolving matters when you meet, but encourage further communications with them.

BANKRUPTCY PLANNING

If bankruptcy becomes the only way out, intelligent, advanced planning and competent legal counsel are essential for protecting and preserving your assets. The state and federal laws are there for your benefit. Do not be afraid to use them for their intended purposes.

The framers of the U.S. Constitution in Article I gave Congress the power to establish uniform laws on the subject of bankruptcies throughout the United States. Discharge of debts began as early as 1841 and the first modern bankruptcy law was adopted in this country in 1898. Thereafter it was amended in 1938, again in 1978, 1984, and several subsequent occasions thereafter.

The role of the Bankruptcy Court today is to resolve issues of outstanding claims and give the debtor a fresh start without past burdens. This is bankruptcy law.

And be prepared, if you do file bankruptcy, that you can, and oftentimes will, lose some of your investment property. And too, understand that bankruptcy will adversely affect your credit standing for several years to come. While you will not be required to wear the scarlet letter "B" on your chest, it will probably have more effect on you personally, than others who learn about it.

But if filing for bankruptcy becomes a necessary option to fend off the creditors, or if you are unable to pull together an agreeable strategic payback plan, then you must review the exemptions that are allowed in the state that you presently reside in and consider if moving to another state makes financial sense.

Anyone planning for bankruptcy with sizable amounts of assets should always consider relocating to another state, which allows for greater amounts of exemptions under those state laws. The possibility of such a move should be contemplated as early as possible, if bankruptcy looms on the horizon.

STATE EXEMPTIONS

Each state permits certain categories of assets to be excluded, in part or in whole, from creditors during bankruptcy.

In other words, your creditors cannot attack certain assets. For example, most states exempt a portion of your wages from your creditors. This amount can vary from zero to one hundred percent. In certain states you can completely, or mostly, exempt the category of wages you receive from your creditors claims.

Disability Insurance and certain motor vehicles are generally in a class of assets that generally receive preference in your favor and not your creditors; personal household items and burial plots, and payments for health and life and accident insurance are generally excluded; and retirement plans, diamond rings (depending on size), tools, furniture, liquor permits, animals, and certain security deposits are other types of exemptions, depending on the state in which you file for bankruptcy.

HOMESTEAD EXEMPTIONS

Even more significant is the difference in personal home exemptions that are allowed state by state. Because of this, it is not unusual to find families facing the prospect of filing bankruptcy to sell their home and moving to another state. They simply flee a state with little or no homestead exemption in favor of a state with substantially more generous homestead exemptions laws.

Some states have no homestead exemptions at all. That means you have no protection for your home, often the largest asset, if you file for bankruptcy in any of those states.

States offering a more creative opportunity for placing large amounts of assets into a home and protecting them from creditors are Iowa, Kansas, Minnesota, and South Dakota.

Perhaps the two states offering the best opportunity to protect and preserve your assets are the states of Florida and Texas. This is particularly true, considering the value of homes and properties in many parts of these states. In other words, you have a reasonable degree of preserving your money placed in your home in these two states following the conclusion of your bankruptcy.

For example, in the Sunshine State of Florida, 100% of the value of your home located on up to ½ acre within a municipality is exempted, and 100% up to 160 acres in rural areas. What makes Florida more attractive than other states with similar exemptions is primarily the resale value of homes. The home prices are generally far greater in Florida than in other rural states, so you have far greater amounts of money that you can place into an existing or new home, and remove it later, following the bankruptcy.

Not to be outdone, in levels of grandeur, is the state of Texas. This state offers an unlimited homestead exemption if the home is located on up to 1 acre within a city, or 100 acres located elsewhere; and a family can exempt up to 200 acres outside of town. And importantly, the exemption can be retained if the property is rented to someone else, providing you do not purchase another homestead.

Considering the value of some of the ranches in Texas, and beachfront and other exclusive homes located in Florida, a huge amount of money can be stashed into a home in either of these two states, protecting and preserving for your benefit if you plan ahead for bankruptcy protection.

HOW PLANNING CAN WORK

In practice, does advanced bankruptcy planning really work? You bet it does!

One celebrity case included former Baseball Commissioner Bowie Kuhn who sold his New Jersey home for $1,000,000 and moved to Ponte Vedra Beach, Florida, just before his New York law firm went belly up (Keep in mind that New Jersey has no homestead exemption!). Under New York law, Kuhn could have been held personally responsible for the debts of the partnership.

Another noteworthy celebrity was Marvin Warner of the failed Ohio-based Home State Savings Bank, who quickly sold his Ohio horse farm and purchased a 160 acre horse farm outside of Coral Gables, Florida, for $2,200,000. Taking full advantage of Florida laws, Mr. Warner was able to protect approximately $6,000,000 in assets from creditors when the bank failed, which compared to Ohio law where only $5,000 in homestead exemptions were available. And he was able to protect over $3,000,000 in cash by investing in annuities, a benefit he would not have attained in Ohio.

And onetime corporate raider Paul A. Bilzerian declared bankruptcy for a second time in Florida in January, listing $140 million in debts. Mr. Bilzerian, home is a $5 million, 11- bedroom, 36,000-square-foot estate, and the largest private residence in the Tampa Bay area, complete with indoor basketball court, movie theater, nine-car garage and elevator. He once called it his "Taj Mahal." The provision in Florida law that allows Mr. Bilzerian and others to keep their homes.

THE RULES

What are the steps you must keep in mind if you see a hint of a calamity on the horizon? There are several basic steps to take now if it is possible that financial problems may be lurking. However, the very best time to take action is when you are not presented when any problems, and are acting to take protective measures for the future.

The importance of solid, advance asset protection planning is covered in greater detail in my book "How to Legally Protect Your Assets."

First, plan well in advance of filing for bankruptcy. There are clear bankruptcy laws that will "unwind" a transfer if done to defraud, hinder or delay your creditors. Fraudulent conveyances used to defraud your creditors by avoiding pre-established rights to your assets, must be avoided.

The more contemporaneous transfers are with filing for bankruptcy, obviously the more suspect your actions become. Taking action far enough in advance is always desirable, if not essential. Too often debtors wait until the last minute to react, and then it is often too late to do anything, except perhaps panic.

Second, do not be too greedy. Taking aggressive steps to protect and preserve your assets often falls into questionable gray areas. If you are walking the fine line between what you can and cannot do, use great caution. If you are acting in good faith and do not become too greedy with assets, you may be able to finish a bankruptcy in far better shape than if you did nothing at all.

Finally, get good competent legal advice and know the laws of the states that apply in your situation. You can do the same as Bowie Kuhn, Marvin Warner and Paul Bilzerian did by selling your home and moving. And then you can arrange your affairs far enough in advance of bankruptcy, so that you can maximize the amount of property claimed as exempt, therefore minimizing the amount subject to creditor’s claims. This can be accomplished by converting your assets from nonexempt to exempt property, and using nonexempt property to pay off debts of exempt property.

The bankruptcy laws permit pre-bankruptcy planning and converting nonexempt status of property. Remember, the goal of the Bankruptcy Code is to allow you to get a fresh start. Following top-notch legal advice early on so you stay within the rules is essential. If a short term or long term financial crisis appears in your future, there are clearly opportunities to protect and preserve your assets.

CHANGES LURKING IN WASHINGTON?

The present practice of moving to a favorable state to protect your money in a high-end home open is under threat by a bill pending in Congress to overhaul the nation's bankruptcy system. The issue also has the potential to embarrass President Bush, an avid supporter of a bankruptcy overhaul, who was also a passionate defender of the unlimited homestead exemption when he was governor of Texas.

If the bill passes Congress, President Bush will be in a real dilemma to veto or sign the new bankruptcy law which could eliminate or reduce the homestead exemption. Enshrined in the Texas Constitution, the exemption is wrapped up in the early history of the state, many of whose early settlers were debtors from the Deep South who had lost their farms in bankruptcy. In 1998, Mr. Bush, then governor, said that any effort by Washington to end the unlimited exemption "would be a clear violation of states' rights."

Last month, by overwhelming margins, the House and Senate approved versions of a bill to rewrite bankruptcy laws, which would curb the ability of many debtors entering bankruptcy to wipe out debts and unsecured loans. The Senate inserted an amendment that would cap the amount of home equity that could be shielded from creditors at $125,000. This exemption is higher than permitted by most states, but would intrude into the sovereignty of states like Florida and Texas that permit a much higher exemption.

Mr. Bush has said repeatedly that he wants to sign a bill that would overhaul the bankruptcy system, a move that would delight the credit card companies and banks that were the source of some of his largest campaign contributions last year. But his signature on any bill ending the unlimited homestead exemption would prompt howls of anger in his home state. In a 1998 letter to the House Judiciary Committee, then Governor Bush said a "homestead cap is a clear violation of states' rights with regard to state private property."

A White House spokeswoman, Claire Buchan, would not say what Mr. Bush would do if presented with a bill that limited the exemption. No doubt, the next few months will be important to watch as to whether an important asset protection planning tool will be saved or lost in any changes in the Bankruptcy Code.

To learn more about the many, many other legal tools to help protect your assets see "How to legally Protect Your Assets" found on this site.