Confessions of a Debt Junkie

[Muffin]

This is a post of bearing my soul, today is the first time that I have been refused credit in my own right. It as come as somewhat of a shock but is probably not before time.

The story, this morning I went to the bank to extend the business overdraft, one of our competitors has come up for sale and it is a nice little addition. The purchase is only $150,000.

The bank manager asked me for all my personal financial dealings, it is embarrassing but I keep a little post-it note in my wallet with who and what so that I don't have to wait. I got to the end of the first side and the manager looked me the eye and said no! I sat there flabbergasted, he then asked me for the rest of the details, I sheepishly passed them across, he then said the words that are still ringing in my ears... You are a debt junkie...

But I am cashflow positive and have significant equity, I cried. You might be but your debt still increased last year, you just keep borrowing, it has to stop. The bank is not going to give you anything more money until you amortise some debt, he said. In a huff I said I would refinance, he told me there was no chance, he had already spoken to my other bank managers...

So here is my confession, laid bare for all to see...

I acknowledge that I am now a debt junkie.

I have to admit there is too much of a good thing and I have well and truly consumed too much.

The debt balloon has been a fun trip, but I am beginning to see that it is only taking me over the ocean at the moment and I need to get back to some safe land for a little while.

[BusyLizzy]

Oh dear....

Maybe they have a Debter's Anonymous group for you? "Hi, I'm Muffin and I'm a debt junkie?!"

So what's the plan now?

[Muffin]

We are going to have our own twelve step process....

The first is to move a regional town (as there are no banks there anymore);

The second forget to pay the phone bill for a couple of months (thereby ruining your credit rating);

Apply for 100 credit card and cancel the application the following day (a sure fire rating killer);

Start writing letters to the editor about how bad banks are (this is one way to get firmly on their bad books);

Still working on them, but will have them by the end of the day.

The plan...

Dwelling on it now with a green tea in one hand and the other searching for a chocolate backed biscuit.

I never actually realised how much interest I am paying (I have been working it out over the last hour), it is frightening. Also I never actually thought how my partner would cope if I fell off the perch, my affairs aren't actually that simple (there are 14 trusts and 17 companies).

I realistically think a week or two of reflection won't hurt...

[ActionMan]

Hey Muffin

"When we are flat on our backs there is no way to look but up"

I am sure you're intelligent enough to work you way out of this.

"The man who makes no mistakes does not usually make anything"

My bit of encouragement.

[CJ]

Dare I mention second teir lenders.

Maybe a bit of consolidation might be in order - do you really need that many companies/trusts.

[spurner]

Banks make and increase profits by getting people into debt, so sounds like your bank manager was having a bad day!

I was refused financing in similar circumstances, went to see someone else in the same bank who fell over themsef to give me the money.

Hope you can continue with the debt monster...

[spaceman]

14 trusts and 17 companies!!!!

NZ's own version of ENRON .

Hopefully without the sticky end as Muffin has promised to buy me a sports car after his partner gets a merc........ thats what I took your earlier reply to me, to mean anyway!!

Good luck

Cheers
Spaceman

[revdev]

crikey muffin, your accountant and lawyer must LOVE you! Smoke and mirrors...

G

[spaceman]

But seriously

Call me slow if you like... but I don't see the problem.

You say you have +'ve cashflow and significant equity ...so what if you owe more money than last year as long as you also own/control more assets than last year as well.

ie :

year 1 $1,000,000 debt and $500,000 assets

year 2 $2,000,000 debt and $1,100,000 assets

If this happens ...yes you have more debt but you are in a better position

I could understand if the example went something like this.

year 1 $1,000,000 debt and $500,000 assets

year 2 $2,000,000 debt and $900,000 assets

If this happens it would appear that you have gone backwards... however this might not be true for a whole host of reasons and you may well be in a better position.

Am I missing something again???


Cheers
Spaceman

PS For only $150,000 I would promise never to enter into competition against you

[RentMaster]

If the bank is refusing additional funds then maybe that is a good indication that you are a high risk, and it is something you need to work on. Banks dont turn down finance lightly. They obviously believe your finances are too risky. You could try another finance company, but I think with a prospect of harder economic times coming, now is a good time to step back and take a look at the big picture and improve your position.

But some people are more risk tolerant than others I suppose.

[Muffin]

The manager and I have been friends for a long time and the talk was predominantly because I have reached the point were cross collateralisation is making the borrowing ability a bit tough.

Second tier lenders are fun, but as someone who lends on a second tier basis it is somewhere that I am very afraid of visiting.

Basically it breaks down like this;

- Finance company 1, has lent our $25m, owes $16.5m, personal guarantee for borrowings;
- Finance company 2, new company but personal guarantee of $2m;
- Consulting business, overdraft of $500k;
- US property $2.7m loan over $3m property;
- Indexed funds $3.5m over $4.5m in stock;
- Fixed interest and cash which is securing the finance company $750k;

It is not like there is no equity, it is just that the cross securitisation ahs made life tough, with three banking arrangements, each is basically trying to cover their own backs....

[Muffin]

The confession of the debt junkie is that I have really created a rod for own back by borrowing from wherever I could, this meant that I have leveraged my equity too cheaply. Basically cheap debt has meant that I have been borrowing (especially for the equity products) without really considering how it fits into the overall plan.

The entities are purely related to asset protection concerns, basically I have bought each asset in a new entity each time, the reason is that for example if the finance company went under it would not affect the equity products, if I get sued through work, it would not impact on the other investments and so on. Even with the properties they are in seperate trusts because if one burnt down there is a risk that I could get sued for faulty fire alarms etc... Paranoid but it has served me well. But now it is time to reassess and review....

[whitt]

The Hybrid group was has been suggesting for years to spread/ minimise your risk. There is a couple of good articles on there website www.Hybridgroup.co.nz which may be of interest to you to assess your risk.

Now may be a good time in the market to step back and reassess.
Ways to reduce risk could be as simple as:
*Avoid cross collaterising
*Use a interest rate averaging strategy. ( Various loans fixed over different terms). This minimises affect of a interest rate spike in any one year
*Spread you borrowings across various lenders. Once again this can reduce exposure.
*Structures and entities.

Infact this is a good reminder to all of in the property game to always be aware of our risk profile.

[pgflt]

If you are serious.

In a similar, though less dramatic scenario, and at my suggestion, my younger son agreed to read "The Richest Man in Babylon". He got past the excruciating prose, and has now re-organised his finances and is paying off his debt and living within his means. Well worth a look (or re-look).