In our previous blog post we talked about Director guarantee debts, and how you may be able to avoid personal bankruptcy by negotiating directly with the creditors. Now let’s look at a couple of cases where Directors managed to do just that.
Carol’s success story
Carol* was the Director of a company that traded fast food stores in two Brisbane shopping centres. When setting up the stores she gave Director guarantees to the landlords of both shopping centres, along with financiers to equip and fit out each store.
While one of the stores was trading well, the other was losing money due to competition from other stores in the food court. And the successful store wasn’t profitable enough to compensate for the losses.
She tried negotiating with each landlord for a rent reduction, but she was unsuccessful. The company ceased trading, and a liquidator was appointed.
All-up she owed her four creditors around $284,000.
Carol and her partner jointly owned a townhouse, where they lived with their two children. She had the townhouse valued, and sold her half interest (value less mortgage) to her partner for $75,780.
She then offered $42,500 to her four creditors, to be divided equally at 14.9 cents in the dollar.
On Carol’s behalf, we wrote to each creditor. We provided a detailed explanation of her offer, and the likely outcome for them under each scenario (bankruptcy and Carol’s offer). The information helped them make a quick decision, and after a little more negotiating the two landlords accepted Carol’s offer.
After selling her financed assets she still owed each financier around $40,000. Unfortunately, her partner had also signed one of the financier’s guarantees, which he was therefore liable to pay in full. He negotiated to pay the balance of his debt by regular installments.
The other financier hasn’t contacted us or taken any further recovery action. If they don’t take any recovery action within seven years, the debt may be barred by the statute of limitations. (Carol has put aside the money she’s offering to settle the debt just in case.)
But as things currently stand she isn’t bankrupt, no one is taking recovery action against her and she and her family have kept their house.
Barbara’s success story
While Carol was referred to us by her accountant, Barbara* was referred to us by her lawyer.
Barbara’s husband Derek* was a Director in their family-owned transport business. To obtain a bank loan he gave both a Director guarantee and mortgage over their house. As Barbara jointly owned the house with Derek, she also needed to guarantee the loan to a limit of $450,000 and agree to the mortgage.
Transport is a tough industry to work in, with businesses often succumbing to the high finance costs, fluctuating fuel prices and low margins. Derek’s transport business suffered the same fate, shutting down after years of operations and leaving them owing the bank close to $1.2m.
Other Directors of the business had already gone bankrupt, and the bank was demanding payment from Barbara under her $450,000 guarantee. A $210,000 home loan on their $410,000 house meant they had $200,000 in equity. But even if they sold their house, the bank would receive the $200,000 equity under their guarantee and mortgage, leaving Barbara with the impossible task of paying the remaining $250,000 on her $450,000 guarantee.
By now Barbara had accepted the fact that she’d need to sell the house. But she desperately wanted to avoid bankruptcy.
Barbara’s mother offered her $10,000 to help her settle the bank’s debt. With that in mind we wrote to the bank on Barbara’s behalf. Our proposal was for her to help the bank sell the house (saving them the enforcement costs), and then pay them$10,000 after the sale to settle the $250,000 balance of her loan.
The bank accepted our proposal.
Barbara engaged a real estate agent, kept the bank up to date on the sale progress, and successfully sold the property within the agreed timeframe. She then paid the $10,000 as agreed, and was debt free within three months.
She not only avoided bankruptcy, but also legal letters and eviction notices from the bank, which would have only made the situation worse. And her family could move out of their house once they’d found a place to rent.
Negotiation with creditors is always a good option
In both situations the creditors could have rejected the offers being put to them and just opted for bankruptcy. But when we explained just what they were likely to receive from each option, the choice was obvious.
If a Director guarantee debt is threatening to send you bankrupt, or you’d like to know more about structuring your affairs or settling your debts don’t hesitate to get in touch with us.
* Not their real names