You’ve probably heard that Donald Trump had four bankruptcies, but what does it really mean? Let me tell you my story to really explain what bankruptcy is and how it can be one of the most powerful tools in business. Growing up I had a somewhat unique situation. When I was only 19 years old, my grandmother passed away, leaving me the owner of over 30 multi-million dollar properties in Santa Monica, Calif.
The problem with this was the economy collapsed a few shorts months afterwards, leaving me holding the proverbial bag. I had zero cash flow to sustain my business, but I did have equity in the units. Unfortunately, the rentals had just stopped coming in. People were either staying put in their current living situations or were looking for cheaper alternatives in housing. I tried to contact the mortgage holders, but they would not talk to me because none of the loans were in my name. When I finally got through to them, they would not agree to modify the loans. With my back up against the wall, I decided that bankruptcy was the only option to protect my assets. Bankruptcy stops any foreclosure proceedings for a time period by issuing what is called a “stay.” Essentially bankruptcy court protects you from your creditors.
There are three main types of bankruptcy: Chapter 7, 11 and 13. Chapter 7 is normally filed in order to eliminate your debt. For example, if you rack up personal debt over time, you can file a Chapter 7 and all of the debt will disappear but your credit will be destroyed for about seven years. Chapter 13 is a personal reorganization plan. It allows you to restructure and pay back debts so you can keep the equity you have saved up, which is normally located in your house, but there a financial limit of $1 million. Chapter 11 is the most complicated of the three and lets you restructure a large corporation or business or under your name. Unfortunately for me, Chapter 11 was my only choice.
Here are seven things I wish I had learned before filing for bankruptcy:
1. Hire the right attorney.
It’s easy to go and interview several attorneys and hear each of their spiel’s about how they’re the right attorney for you. In reality, it’s up to you to ask the right questions and judge their answers. The right questions to me are “Have you ever successfully completed a bankruptcy like this before?” and “What’s the game plan for not only filing but coming out of bankruptcy ahead with as much equity as possible?”
Unfortunately, hindsight is 20/20, and I hired an attorney who had never filed a Chapter 11 case before because he was cheaper than the alternatives and I wanted to save money. Ultimately, I learned the hard way that cheaper often costs you more in the long run. Halfway through the case, we started losing every motion, and it quickly became clear that this guy and his firm had no idea what they were doing. Eventually, I had to find a new attorney who was familiar with handling cases like this, and ultimately it helped pull me out of bankruptcy. The worst part is I interviewed her first and should have gone with her the first time, realizing the other attorney was cheaper for a reason.
2. Know your judge.
Research your judge. Ask around to find out as much as you can and learn what they like and don’t like. All judges are different! Some prefer their paperwork a certain way with file tabs, others don’t. Each judge has their little nitpicky items.
Some judges are pro-creditor, some judges are pro-debtor. Pro-debtor means they tend to side with ones who filed bankruptcy, pro-creditor means they tend to side with the ones that you owe money. This information is immensely important for knowing what obstacles lay before you and how you can overcome them. My first judge was pro-debtor, and he retired halfway through the case. My second judge was very pro-creditor, which made my life a living hell.
3. Create a business plan before you file.
Sit down and figure out a plan that would work for you. Type out an Excel sheet for a plan, something to the effect that if you sell this at this time, you’ll be able to afford to pay your debts and have this left much over. This can be fairly complex, so have your attorney walk you through it. I would also recommend talking to your attorney about how to structure it and if it’s feasible.
4. File the bankruptcy petition with a plan ready to be in place.
Make sure you have your plan completed as quickly as possible. If the plan changes that’s okay, as long as you have the right blueprint from the beginning. Time is why you should file a Chapter 11, but don’t abuse it and try to gain any time. As soon as bankruptcy is filed it isn’t fourth quarter crunch time — it’s overtime and your team is down. Don’t waste the extra time you’ve been given.
5. Don’t play any games with bankruptcy courts.
The court, believe it or not, is there to protect you. Make sure you treat it with the respect it deserves. Don’t try to hide assets or certain purchases, because it could hurt you in the long run and get your whole bankruptcy denied. Always be honest and forthcoming with the courts. Don’t forget to file your MORs (Monthly Operating Reports) on time.
6. Plan for the down times.
If everything is going well, don’t forget to save money. Everything has a lifespan. Plain and simple. You know never when the next economic collapse could happen. I suggest saving for down times as much as possible, even if it’s only a little. It’s always great to have reserves.
7. Use what you learned.
So far, bankruptcy has been the most valuable yet difficult time in my life. But, because of it, I feel like I’ve learned an enormous amount about how to properly forecast and evaluate my business and its future. My advice is to learn from your mistakes and do your best to not repeat them. Use your mistakes to become a better you. Plan better, and stay ahead.
Bankruptcy can be one of the most valuable tools in business. Regardless of its negative connotation, it has helped build and reconstruct some of the largest financial empires to date. Don’t be afraid to file it — just make sure you’re doing it right.