PB4L

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Creditor Proofing And Organizational
Structure For Entrepreneurs
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• By Professor Bruce M. Firestone, B.Eng. (Civil),
  M.Eng.-Sci., PhD., Entrepreneur-in-Residence,
  Telfer School of Management, University of
  Ottawa Executive Director, Exploriem.org
  Founder, Ottawa Senators Real Estate Broker and
  Mortgage Broker, Century 21 Explorer Realty Inc.,
  Brokerage
• www.Twitter.com/ProfBruce

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• Creditor Proofing
• Bankruptcy trustees, supposed to give someone in
  trouble impartial advice,
• Influenced by fact that if you decide to go
  bankrupt, thats a new customer for them
• Banks and financial institutions are unlikely to
  be your friend in need 
• Call your loan immediatelyso they can be first
  in line to grab your assets

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• Creditor Proofing
• Really no such thing as Creditor Proofing
• Putting money in secret overseas, numbered bank
  accounts, protected by bank non-disclosure laws
  in neutral countries like Switzerland or pirate
  havens in the Caribbeanbad idea
• Neal Stephenson, Cryptonimocon, describes data
  havens
• Nothing is private or secret any longer

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• Creditor Proofing
• Ken MacMillan, old fashioned guy
• Thought best way to creditor proof yourself was
  to not have any creditors
• Paid his bills on time
• Lived within his means
• Saved money every month
• Paid cash for his home and only purchased what he
  could afford

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• Creditor Proofing
• When Ken passed away, estate attracted no death
  duties or terminal tax liability because he kept
  all of his money in cash
• No deemed disposition of stocks, RRSPs, property
  (other than his primary residence, which is tax
  free in Canada anyway)
• Canada Revenue Agency (CRA, equivalent of IRS in
  US) didnt take away half of his estate
• There were no lawyers and accountants involved to
  take away other half

7

• Creditor Proofing
• Father-in-law did not think much of me
• Built real estate empire and then a NHL hockey
  franchise with huge land assembly
• Largely with debt
• He was not impressed

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• Creditor Proofing
• Late Harold Shenkman, Founder of Shenkman
  Corporation, large real estate holding company in
  Ottawa once told me that
• the way I kept a good relationship with my
  Bank (the Royal Bank of Canada) for over 40
  years, Bruce, is that they always owed me
  money. 

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• Creditor Proofing
• Billy asked me what I was going to do when I got
  into business in 1982
• Told him I was going to build office buildings
• Billy said he was going into parking lots
• At the time, parking in downtown Ottawa was about
  25/month
• Office rents in western suburbs were 18 per
  square foot triple net
• By 1987, parking rates were around 80/month
  while office rents down to 6 bucks

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• Creditor Proofing
• In 2000, went to my Bank to see mutual funds were
  doing
• Gave them 100,000 in cash in 1995 to invest in
  their Bank mutual funds
• Supposed to receive a monthly statement never
  got a single one
• In greatest bull market since 19th century RR
  bubble, they turned 100k into 90k  

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• Creditor Proofing
• Banks mutual funds were among 10
  worst-performing mutual funds in Canada
• Managed to lose compounded average of 2.5 per
  annum for 5 years
• Monkey throwing darts at list of Canadian mutual
  funds would have done better

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• Creditor Proofing
• How to Get in Trouble?
• 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 cant
  keep track of all the payments you have to make

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• Creditor Proofing
• How to Get in Trouble?
• 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 cant get another mortgage
  on your house

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• Creditor Proofing
• How to Get in Trouble?
• your bank wants you to change your Line of
  Credit into a term loan so you pay it off and
  then they wont renew it you need to go to
  private lenders for loans at much higher than
  prime lending rates. you cant get any new
  financing at all.

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• Creditor Proofing
• Causes?
• drinking/drugs/gambling
• job loss/divorce/illness
• failed biz model/entry of new competitor
• inadequate sales
• receivables age major client goes bankrupt
• insurance claim disallowed (Bora Laskin)
• fail to control costs
• loss of hope

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• Creditor Proofing
• Refi your personal residence?
• drive-by appraisal FMV, fair market
  value LTV, loan to value ratio
• QSV, quick sale value
• 48 hour refi
• or leg breaker loans.

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• Creditor Proofing
• Human beings cannot live without hope
• Three days to recover
• First, to be angry at the world
• Second, to feel sorry for yourself
• Third, get some exercise and get on with rest of
  your life!

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• Creditor Proofing
• Personal Bankruptcy Option
• US execs proud to tell stories of companies in
  financial difficulties turned around by taking
  them into Chapter 11
• Not same as personal bankruptcy
• many things you can not do teach, police
  officer, security clearance, get credit card, get
  cell phone, visit some countries, be Director or
  Officer of publicly traded company, be an
  Accountant, buy on credit, get mortgage...

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• Creditor Proofing
• Get complete discharge from bankruptcy after a
  few years or even months and your record wiped
  clean?
• Total bunkdata havens 
• Personal bankruptcy, you end up paying three
  times!

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• Creditor Proofing
• First, you pay court appointed Bankruptcy Trustee
  to manage your affairs (you have new boss)
• Second, not discharged from some of your
  responsibilities (like, alimony) or Judge may
  decide you have good earning potential/put future
  earnings in pot for your creditors
• Thirdly, youll pay higher costs for everything
  no OAC for you!

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• Creditor Proofing
• How to Get out of Creditor Hell?
• If you drink too much, stop!
• Terry Matthews takes 7 to 12 years to build great
  business/hard work and focus required
• So itll take you and me longer!
• Lower your costs
• Fortune 100 corporation  CEO could not control
  his costs collecting grand masters

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• Creditor Proofing
• Control Costs?
• reducing the number of phone lines you have,
  having a home office instead of a plush downtown
  office, doing our own filing instead of hiring
  a clerk, answering your own phones, sending
  your kids to public school instead of private
  school,

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• Creditor Proofing
• Control Costs?
• 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 Waikiki,
  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,

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• Creditor Proofing
• Control Costs?
• 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,

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• Creditor Proofing
• Control Costs?
• reducing the number of dinners out, brown
  bagging your lunch, planning your day to become
  more efficient with your vehicles, buying gas
  when its cheap, maintaining your vehicles so
  they last longerdoing preventive things like
  remembering to change the oil once in a while,
  doing minor house repairs and routine maintenance
  yourself

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• Creditor Proofing
• Raise Revenues?
• 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?

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• Creditor Proofing
• Raise Revenues?
• 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.)

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• Creditor Proofing
• Whatever you do, dont ignore your creditors
• They hate that
• Will definitely report you to credit bureau
• Kill your credit rating
• 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

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• Creditor Proofing
• Terrace Investments Ltd policy of not kicking
  tenants out when they had financial problem
• Not suing them either
• Lower rent by agreement during tough times and
  get it back during better times
• 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.

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• Creditor Proofing
• If you are honest with people, most of them will
  cut you some slack
• Error of omission versus commission
• It is the definition of insanity to repeat the
  same things over and over again and expect a
  different result, Anon.

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• Creditor Proofing
• What to do if You or Your Company is Petitioned
  into Bankruptcy?
• Fight it, especially if its personal bankruptcy
• If vindictive creditor just wants to hurt you,
  they may try to petition you into bankruptcy
• You dont have to accept that

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• Creditor Proofing
• Meeting face to face with your most difficult
  creditors is generally a good ideathey see that
  you are not such a bad person after all
• Lawyers dont want to settle you do
• Is it any surprise that NHL experienced a
  year-long lockout when NHL and NHLPA were both
  led by lawyers? Gary Bettman and Bob Goodenow 

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• Creditor Proofing
• If you or your company do go bankrupt tell the
  truth
• The smart truth
• Cokes soda pop dispensing machine that increased
  prices when temp increased
• In our society when things go wrong, we always
  want to find someone to blame
• And that someone is you

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• Creditor Proofing
• 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.

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• Creditor Proofing
• 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 cant handle it yourself, get a lawyer.

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• Creditor Proofing
• Dont get bullied or rushed into premature
  answers. Tell them youre 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
  Hearstshe 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.

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• Creditor Proofing
• 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
  US) count on in a cross-examinationthat they can
  brow beat and rush you into damaging admissions.
  Even experienced, professional witnesses feel
  intense stress during these types of crosses.

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• Creditor Proofing
• You would be surprised what people will admit
  toeven things they did not do just to get them
  to stop. You never let people like this put
  words into your mouth. Dont repeat bait words
  like Isnt it true Mr. Smith that you paid
  bribes to City officials to get your permits
  released? You dont answer I never paid
  bribes because the next question will be Well,
  Mr. Smith, if you dont 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.

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• Creditor Proofing
• 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.

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• Creditor Proofing
• Your Credit Rating
• If you owe money to IRS or CRA, this is serious
• CRA can get an ex parte judgment against youthey
  can get judgment against you without you being in
  court or even being notified of fact that legal
  proceeding is taking place
• Atrocious

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• Creditor Proofing
• With judgment against you, they now have power to
  ruin your credit rating
• To send bailiff in without notice
• To garnishee your wages
• To seize any property you have and much more

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• Creditor Proofing
• Credit rating torpedoed?
• Youre sunk
• No OAC
• Credit bureaus are hugely powerful
• Keep track of all credit cards, mortgages, Bank
  debt
• Even number of requests made on your credit
  rating lowers Beacon Score

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• Creditor Proofing
• Absolute right to demand from each credit bureau,
  free copy of your credit report
• Check it!
• SMEE owner had his credit score cratered when
  Bank held certified cheque and bounced all his
  payments

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• Creditor Proofing
• The Proper Role of Debt
• Recommend to students buy their own home, condo,
  townhouse, as soon as they can
• To do that, most need mortgage
• Mortgage can be a form of useful debt
• How many can save 700 a month? None
• How many can afford 700 a month in rent? All
• So why not buy a home?

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• Creditor Proofing
• Part of every months blended mortgage payment
  pays off principal
• Over time ? mortgage-free home
• Forced savings
• Home equity is world no. 1 source of startup
  capital
• Wealth effect imputed rent

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• Creditor Proofing
• 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 lets
  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 amountyou 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.

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• Creditor Proofing
• Not all debt is bad
• But buying NHL hockey team with debt is probably
  bad idea
• Good debt is secured debt so that, if for some
  reason you cant make your payments, when you
  sell the underlying asset, the debt goes away
• Good debt is that it is secured by an asset whose
  value is likely to exceed the unamortized portion
  of your debt throughout its term (i.e., probably
  not car loan)

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• Creditor Proofing
• Bad debt unsecured personal debt where only
  recourse is to youcredit card debt and student
  loans, for example
• Note can be upside down on equity in your home
  in hurry if market crashes as it did in parts of
  the US in 2008/09 when home prices collapsed in
  Florida, Arizona and California by as much as 50
• Good debt may also be debt that creates return on
  investment

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• Creditor Proofing
• How to Reduce Your Risks and Protect Your Family?
• Dont protect your family by hiding your assets
  on Pirate Island
• Dont be financial engineer
• Never buy an asset to lose money so you save
  taxes!
• Be proud to pay your taxes in a great country
  like Canada, but dont pay more than you have
  to. 

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• Creditor Proofing
• Free to arrange your affairs in a way that is
  efficient and effective, as long as it meets GAAP
  (Generally Accepted Accounting Principles)
• Keep your affairs simple
• LLCLimited Liability Company.
• Apart from a few institutions that are other
  directed (like the Holy Roman Catholic Church,
  The Emperor of Japan or the House of Windsor),
  longest lived organizations on planet are
  incorporated companies

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• Creditor Proofing
• LLC limits some but not all of your personal
  liability
• In Ontario, Directors and Officers may be held
  personally liable for environmental contamination
  or non-fulfillment of statutory obligations like
  remitting HST (Harmonized Sales Taxes), PST, PAT,
  income source deductions 
• In order to avoid such personal liability,
  Directors must show they have been duly diligent

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• Creditor Proofing
• Incorporate personal holding company (PHC)
• Put your assets in there except for principal
  residence
• In Canada you can sell your principal residence
  tax free, so it should not go into PHC
• Principal residence should go into spouses
  namespouse with lowest risk profile

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• Creditor Proofing
• In Ontario, if you get divorced, half of
  everything you own goes to your partner and vice
  versa
• Dont pledge your house to secure loans if you
  can avoid it
• Try to pay off your mortgage as soon as you can
• Creditors (in Canada) can get at your RRSPs, so
  make sure you max out your spouses before your
  own

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• Creditor Proofing
• Some types of insurance-based products (e.g., seg
  funds) are creditor proof in Canada
• Individual Pension Plan (IPP) is defined benefit
  registered pension plan that a company
  contributes to on behalf of owner
  manager/employee
• Contributions are tax deductible to company and
  non taxable to owner/manager
• plan must be registered with Canada Revenue
  Agency and is fully creditor protected since it
  is bona fide pension plan

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• Creditor Proofing
• You own small percentage of your PHC
• Spouse and kids own majority
• If you get in trouble, PHC may not go down drain
  with you
• If you own only a nominal shareholding in PHC,
  upon your passing, taxes on deemed disposition of
  your assets will be minimal
• Companies can live forever, you wont

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• Creditor Proofing
• If you have home office for your PHC, some of
  costs of running your home may be tax deductible
• Inter-corporate dividends between two Canadian
  companies may be tax-free
• So you can find efficient ways to get money into
  PHC and out of PHC into hands of yourself and
  your family

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• Creditor Proofing
• You or your spouse or both might become
  consultants to your PHC
• Your PHC might be a consultant to your clients or
  other companies
• Often first step toward full-on entrepreneurship
  is to turn yourself into consultant instead of
  employee

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• Creditor Proofing
• Your PHC owns shares in your op co and in your
  real estate co
• Your op co rents from your real estate co at FMV
• Move profits to real estate co and up from their
  via inter-corporate dividends
• Capital dividend account create opportunity to
  dividend out, tax free to shareholders of PHC
  including you, your spouse, your kids

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• Creditor Proofing
• Diversify!
• Buy a home (townhome or condo) as your principal
  residence and pay off your mortgage
• Buy some residential rental property with 5 down
• Buy some commercial rental property with 25 down
• Buy some land with 50 down

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• Creditor Proofing
• Diversify!
• Set up a PHC
• Have an operating company, a PB4L
• Have an iron reserve
• Have some financial assets
• Manage your assets and manage yourself!
• _at_ProfBruce