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Title: PB4L


1
Creditor Proofing And Organizational
Structure For Entrepreneurs
2
  • 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

3
  • 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

4
  • 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

5
  • 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

6
  • 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

8
  • 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. 

9
  • 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

10
  • 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  

11
  • 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

12
  • 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

13
  • 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

14
  • 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.

15
  • 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

16
  • 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.

17
  • 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!

18
  • 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...

19
  • 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!

20
  • 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!

21
  • 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

22
  • 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,

23
  • 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,

24
  • 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,

25
  • 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

26
  • 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?

27
  • 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.)

28
  • 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

29
  • 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.

30
  • 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.

31
  • 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

32
  • 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 

33
  • 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

34
  • 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.

35
  • 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.

36
  • 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.

37
  • 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.

38
  • 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.

39
  • 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.

40
  • 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

41
  • 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

42
  • 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

43
  • 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

44
  • 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?

45
  • 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

46
  • 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.

47
  • 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)

48
  • 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

49
  • 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. 

50
  • 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

51
  • 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

52
  • 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

53
  • 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

54
  • 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

55
  • 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

56
  • 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

57
  • 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

58
  • 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

59
  • 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

60
  • 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
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