Tag Archives: bankruptcy

Bankruptcy Stats Are On the Rise…and Alternatives…

There were multiple media stories a few weeks ago that the bankruptcies and proposals in Canada are rising rapidly. They were up over 9% from April a year ago nationally.

OK, that’s true. But…First, it’s comparing a pretty low year, so the percentages are quite misleading – percentages almost always are. Just look at the report that Vancouver home sales were up 44% last month over a year ago. Yes, but off an incredibly brutal April last year. So I always want to see the real numbers and not the percentages. In BC there were 22 more actual bankruptcies than a year ago, in Alberta exactly 100 more, and less than 150 for the whole country. (That’s bankruptcies and not proposals where there is some kind of payback set up through a trustee).

Every single bankruptcy is a very personal and often tragic or heartbreaking story. Yet, every person who has to file, should also be admitting that they caused it and are responsible in one way – some small or big way – or another. There is zero chance someone who is debt free will ever file for bankruptcy.

For anyone coming out of bankruptcy the question to ask is if they’ve learned that lesson and will never go down the debt road again. Then, read the rebuilding credit chapter in the Money Tools book for the five steps (and only five) to rebuilding your credit.

For anyone wondering if they can make it back from the edge of financial trouble, here are a few things to consider:

-There is a recession coming. I first started talking about it a year ago. It’s going to rain – get an umbrella now. Pay off what you can. Not a few bucks extra here and there – read the step up plan to pay off your debts smallest to largest.

-Most people also don’t need to file for bankruptcy. Canada does not have a debtor prison. It’s perfectly OK to stop paying your credit card. They’ll call, they’ll have a fit, they’ll send you nasty letters but that’s it. Tell them calmly that you don’t have the money and you can email them your bills in order of priority and your income. They’re not even going to want it – trust me.

-Ask  yourself if you have your priorities straight: Food, shelter and utilities are fist. If you have enough income for a roof over your head and food you’re doing OK. Everything else comes after that. When you’re out of money on paying your priorities – the rest will have to wait – period.

George Boelcke – Money Tools & Rules book – yourmoneybook.com

How the Rich Spend Their Money..and Go Bankrupt

 

If you’ve ever wanted an insight into what rich people do with their money, here it is. It’s a research report from Personal Capital of over 50 NBA players. In some ways, they’re not so different from you and me. In other ways, you definitely don’t want to emulate what they do!

The average income is around $45,000. THAT is roughly what the average NBA player SPENDS in a month! But then, the rookie entry salary in the league is $4.7 million. But let’s see what they spend that half a million on every year:

11% goes to clothing and shoes – their biggest trackable expense category.

9% is automotive – even though most of them likely get a free vehicle from a dealership in return for some endorsements.

8% is travel – after all, it’s a long off season, and they like to travel in style, and to 5-star hotels and resorts, which isn’t cheap.

Restaurants eat up 7% of their spending. That’s around $35,000 a year, which will get you some great meals, even if you’re picking up the tab for others in your group.

Sadly and surprisingly, 7% is also what they donate to charities. That’s kind of a puny percentage for an income of more than five million bucks if you ask me.

5% goes to a category called service charges and fees. It’s kind of obvious here that over $25,000 of fees means they’re really not very financially literate, and certainly don’t shop around at all.

The one place they do seem to want to save money is shopping at Walmart. Yes, the average NBA player shops there, too – to the tune of over $45,900 a year!

But here’s where you want to be very different than an NBA player: Over 78% of them go bankrupt within two years of retiring from pro basketball. We spend what we make – that is: we spend to the amount of our pay. That’s not a good idea for us middle class earners or millionaire income athletes.

Yes, there are stories of pro athletes who are incredibly great savers and literally don’t spend a dime of their salary. But for every one of them, there are dozens who crash and burn. Vin Baker made over $100 million in his career and last month started a job at Starbucks to support his four kids. For millionaires and ourselves: Spend what you want, but only AFTER at least 10% comes right off your check, or out of your account, to pay yourself first.

This Couple’s 25% Car Loan Has Lots Of Insights

Last week the CBC did a story of a couple in Kelowna who signed up for a 25% subprime car loan. It exploded on my Facebook page with large numbers of shares.

It’s commendable that the CBC did this feature, and great education, but I’m guessing they didn’t put this family in touch with anyone that could actually help them. But, that aside, I have 20 minutes worth of learning and warnings here, and five minutes to share them. As always, I’ll post the rest of the story on my website.

This couple had a recent bankruptcy on their credit. For five years that guarantees a rate of 20% or higher for a car loan. The dealer got them financed through the TD Automotive division. Where is it the TD’s fault this couple is really high risk. Hello? They defaulted on all their debts in bankruptcy – whatever the reason! Risk equals rate – always will. Just look at the fine print of most credit cards that range from 10% to 27%, or lines of credit from prime to prime plus 6%.

Yes, the dealer probably made over $5,000 on a huge markup of interest rate, fees, and price of the vehicle. They didn’t even get to pick a vehicle – they were told it had to be this one to get financed – not true, but it’s one of so many red flags in this story. Yes, the dealer lied when they promised (if they did promise) the couple could refinance at a decent rate in a year. That was never going to happen, but I hear that promise all the time to get people to sign up for insane financing thinking it’s only for a short time. And if this promise wasn’t in writing it wasn’t true. Never rely on verbal promises as you’ll never collect on them. Now the dealer is offering 5% financing on a new car? THAT would make things so much worse. But that’ll take too long to explain. Someone get this couple in touch with someone who can help, or go to Mosaic and get them my $20 It’s Your Money book – it would have saved them $5,000 or more.

How often does the average person buy a vehicle? Maybe every five years? Well, a salesperson sells 10-12 a month, and the business manager deals with 5-8 a day. So, you have one purchase experience versus 600 sales versus the finance manager having financed and upsold 6,000 times in those five years. With a score of 6,000 to 1 that’s like bringing a knife to a machine gun fight. You don’t have a chance – this couple didn’t have a chance.

Yes, this couple got massively ripped off. But they CHOSE to be ripped off. I’m sick and tired of our ever diminishing personal accountability. I can already think of three options this couple had, other than signing up for a loan that will end up costing them 2 ½ times the price of the vehicle.

But I can already hear a lot of people thinking that this isn’t fair and no wonder the rich get richer. Yup – they have investments and savings while YOU have debt and payments. 90% of millionaires did not inherit their wealth – they became millionaires on their own. 75% of millionaires do not finance their cars. Well – they’re rich…yes, because they don’t do dumb financing. If you want to be a millionaire, get a $2,000 car instead of a $500 car payment. Then start setting aside some money. When you have some savings, step up and buy a newer vehicle. But a $500 car payment will guarantee that you’ll be stuck in debt for another decade and won’t ever be able to save. Go look up what Warren Buffet drives if you want some more evidence.

The average guy can’t get ahead – yes you can – get your finances under control, get rid of the killer car payments, or sell that house that’s eating up 50% of your income. I haven’t had a raise in two years – well – go get a raise. Good chance you get paid what you’re worth in the market place. So up your game, get to work earlier, work smarter or harder, or upgrade your skills. The average guy can’t get ahead? Come on – stop thinking like a victim. This is Canada and not North Korea.

I’m sick of the victim mentality. Repeat after me: If it is to be it’s up to me. The government, or two people in the story stating there should be more regulations, isn’t going to fix your financial life. It’s gotta be you. My apologies if I’m being unclear.

Whatever your borrowing today, at whatever rate or payments, may seem like a good idea and the only solution. But whether it’s a car, a line of credit, a payday loan, or your credit card, it will make things worse, much worse, down the road.

When you say you can’t do it, it wasn’t your fault, you have all these payments, you had to get that loan, or it’s too hard, you’re going to spend the rest of your live proving that you’re right.

PS: Why would a new vehicle loan at 5% make things so much worse?

This couple’s first 30 months of payments has paid almost 75% of the total interest at 25% as it’s very front loaded when they owe the highest balance. Having overpaid on the price and paid very little principal, they’d still owe at least $7,000 more than the car is worth. That shortfall has to be “rolled” into the new loan. Almost 50% of people owe more on a trade than it’s worth – this couple is the rule and not the exception. A new vehicle depreciates 30% in the first year. Even if it’s a $20,000 vehicle, the moment they drive it off the lot, it’s worth $6,000 less. A $6,000 loss and $7,000 hangover of their old one means they instantly owe $13,000 more on the new vehicle…and things get worse and worse and the vicious cycle continues with no hope of trading that one for six or seven years, huge payments again because the $7,000 loss is hidden in the new one and heavens forbid it’s written off or stolen because the insurance pays the real value and not the massive over-financed loan.

A Lot of New Stories This Week

Starbucks, as if they didn’t have enough problems in a recession where people aren’t interested in spending four bucks for a coffee, had a big hiccup on the May long weekend. More than one million customers who paid with credit or debit card were double charged because of a computer error. The company fixed it internally, but it’s another reason to always, always check your statements!

An old 1980’s scam is back that you should make sure you know about. It’s that you’ve won the Jamaican lottery. But you need to first pay for the transfer funds. Sorry, you didn’t win – honest, but this fraud has really taken off again. In fact, gangs in Jamaica are killing each other in fights to get the sucker and reload lists, it’s that hot.

Bankrupt General Motors is cleaning house some more. They just sold their Saab division, which apparently never ever made a dime of net profit for them. OK, and they didn’t actually sell Saab – they gave it away to a small Swedish luxury car maker.

President Obama is proposing a new consumer legislation agency in the U.S. If it passes, and that’s not a given, one big goal of the agency is that disclosure on credit cards and other products be in plain language. The goal is to have any disclosure written at a grade 11 level, one page or less, where someone can read it AND understand it in less than four minutes. Now that’s a great goal.

Have you noticed that the big no-service banks are now in the product sales business in a bigger way? In a mailer this month from the Scotiabank, I received a flyer to buy a Garmin 255 GPS. Why is the bank selling GPS systems? Their price is $300, while Amazon sells them for under $200!

Last week’s American Express rewards catalogue had something I would really really like to buy with my points: A new 2009 Elise SC sports car from Lotus. It’s 14.2 million points. You might guess I’m a little short. But I’d like to know who runs up over $14 million of charges on their American Express!

There was a survey a couple of weeks ago that should be great news: When the economy recovers: 25% of people said that they will return to their regular spending habits, but 61% said that they will stay with their reduced spending and budgeting.

Would you like to have lunch with Warren Buffet in New York? Sure, who wouldn’t! It’s a fundraiser auction for the Glide Foundation and you can bid on E-bay until this weekend. But before you log on: Last year, the price was $2.1 million! It’s for you and seven of your friends. So if you do bid: I would love to be your friend!

Poor retailer Eddie Bauer. They went bankrupt for the second time in four years last week. This time it involves about $420 million in debt. Gees, you’d think they would learn the first time that heavy borrowing doesn’t work. But then, it’s another retailer that we can learn from, because, over the long term, debt doesn’t work for us, either.

Lifestyles of the Formerly Rich and Famous

Getting ahead financially really isn’t complex, or hard to do. We just need to do one thing: Spend less than we make. Yes, it really is that simple to say, but often that hard to do. We just get addicted to our “stuff,” and our lifestyle. Yet, any drop in income has us in denial and clinging to our former spending habits, instead of making some basic adjustments. But with less income, that lifestyle now has to be financed with debt. And like blowing up a balloon, there will always be an end to that shell game.

The rich and famous are even more likely to go through this denial phase. But denial only goes for a short period of time. And that time-frame is often shorter for the rich, since they choose (yes, it’s a choice) to have monthly expense which are a whole lot more than for the rest of us.

In the entertainment field, Zsa Za Gabor, Marvin Gaye, Mick Fleetwood and Don Johnson of Miami Vice fame have all been through a bankruptcy. As has Sopranos actress Lorraine Bracco, M.A.S.H. star Gary Burghoff, filmmaker Francis Ford Coppola, and singers Natalie Cole, Elton John, and Toni Braxton. The most famous bankruptcy likely still to come will be Michael Jackson. Somehow an estimated $500 to $800 million net worth in the 1980s is all spent, and then some. Jackson is holding on by his fingernails, with hedge fund financing and multiple mortgages on his Neverland ranch and his Beatles music catalogue.

But this common, often self-imposed problem, does not just apply to the rich. With bankruptcies up 16% year over last year, and the current recession, more and more people are reaching the danger level.

The National Post last week had a story of a drywaller whose income shrunk drastically last summer. Yet, for more than six months, he stayed in denial by using credit cards to maintain his lifestyle, and to make payment on his “baby,” as he called his Honda Acura. That may work for a while, but by January he had filed for bankruptcy.

Optimism is a great mindset, but when it comes to our debt and finances, staying realistic is always a much better frame of mind. And don’t kid yourself. Filing for bankruptcy is neither easy nor fun. Along with a death in the family or perhaps a divorce, bankruptcy will always rate amongst the top five traumatic experiences of a lifetime.

Black Monday: Why You Should Learn the Lessons

Last week we talked about the nightmare of the bankruptcy of Lehman Brothers, the sale, or give away of Merrill, and the $85 billion loan injection into insurance giant AIG.

There are some big lessons for all of us individuals, as well. Sure, our first thought is about our mutual funds and RRSPs. But how many of us live on credit and are buried in payments of one kind or another?

As long as our income keeps coming in, we’re fine. But what happens when we have to do without a paycheque for two months? That’s the same as cash-flow problems for companies.

What are the odds of doing well, over the long term, if we use borrowed money to do our investing? Now, it’s fine to get a one-year RRSP loan, that’s different. But how many e mails do you want from people who look a line of credit to buy gold at around $1,000 an ounce and it’s now around $800? How many examples would you like of second mortgages to buy tech stocks in the 90s because they were never going to go down and people didn’t want to get left out? It is not investing – that is gambling, pure and simple. When someone jumps out of a 50-storey building, for 49 floors they can convince themselves they can fly. But then reality re-appears in a hurry when they hit bottom.

It’s called leverage and it’s a very dangerous shell game. One of the bankrupt firms was leveraged 33 to 1. That is: for ever dollar of assets, they borrowed $33. When shares, or in their case, these mortgage portfolios they invested in, were going up they were making a ton of money. But with a 33 to 1 ratio if investments drop three percent – that’s all – three percent – their entire assets are wiped out.

When you invest with cash – that’s the most you can lose. When it’s on margin, through leverage, you can be wiped out AND still owe a ton of money after all your cash investment is gone!

The good news? These days the rich will absolutely get richer! Why? There are a bunch of companies who have been around for decades whose stock is trashed for no reason. They have great dividends and their shares just got sucked down with the whole market.

Could you have been one of the rich people? You bet. If you’d have the cash to put into savings instead of paying the credit card, the mortgage, line of credit or the car payments.