Creditor Proofing: Getting Professional Advice Before It’s Too Late

Posted in Debt Help
Posted by Benny Mendlowitz, CPA, CIRP - LIT

creditor-proofing-adviceI have on many occasions reviewed an individual’s financial situation, and it never ceases to amaze me that proper planning is not put into place to avoid personal financial disaster. None of these techniques are illegal, but if they are not put into place early enough, they are of no use.

  1. Before you start a business venture or get involved with any financial transaction that involves risk, get professional advice. And if you didn’t understand me the first time, I will repeat myself: get professional advice. Your accountant, your lawyer or a bankruptcy trustee are valuable resources to help steer you away from trouble. The time to ask for their help is before you find yourself in a financial mess, not afterwards when you are asking them, begging them, to bail you out.
  2. If you are going to start a business, make sure it is incorporated, and not a sole proprietorship. With a sole proprietorship, the company’s debts are your debts. With a corporation, the debts stay with the company; they are not transferred to you personally. (There are some exceptions to this rule; please refer to point #1, and get professional advice.)
  3. If there are valuable assets in your family, i.e., matrimonial home, cars, etc., have them owned by the family member with the least amount of risk. If one spouse owns a business and the other is a salaried employee, it should be obvious to you who has more risk. If both spouses have risky situations, consider a family trust. (Please refer to point #1, and get professional advice.)
  4. I only have one thing to say about personal guarantees: don’t. You went to the trouble of incorporating your business, and now you are going to undo all the good you did by exposing yourself personally. Personal guarantees will be requested by landlords, suppliers and banks. Just say no. But sometimes you can’t, so if you do, don’t offer up the personal guarantee of the spouse who you put all the assets in their name to protect the assets from your creditors. Also, leave yourself an escape clause; you may be able to have the personal guarantee you offered up cancelled when the business grows.
  5. If you are investing money into your business, document it by way of a promissory note and secure it with a general security agreement. Not six months or a year after you invest the money, but from the very moment you put the money in. Your lawyer should prepare the paperwork for you. If the company is ever forced into liquidation, you will at least have a better chance of getting these monies back.
  6. Make sure your business’ government accounts are paid in full. This includes payroll source deductions and sales taxes (GST and PST). These accounts attract personal liability for corporate directors if they are not paid.
  7. Consider splitting your business assets up into different companies. There is no reason why the land and building can’t be owned by Company A, the equipment by Company B, while Company C conducts business with the outside world. Your accountant and lawyer can structure this to avoid putting your valuable assets at risk.
  8. Insurance. Not much more needs to be said. If you have an insurable business risk, make sure it is covered.
  9. While there are discussions underway to amend bankruptcy laws to offer creditor protection to all RRSPs, they are not in place as of yet. Some RRSPs do offer creditor protection, namely those offered through insurance companies where the proper beneficiary is designated. Check with your financial advisor on this one.

None of the above is a substitute for professional advice. Before embarking on any of these strategies, get professional help, i.e., see point #1.