Help clients through bankruptcy

The situation

Your client just lost her clothing design business, her sole source of income.

In previous meetings, she didn’t let on how much trouble her company was in. Worse, she’s racked up $220,000 in debt trying to keep the company afloat over the last six months.

During your meeting, she’s frantic and feels bankruptcy is her best option.

Every year approximately 100,000 Canadians file for bankruptcy. While it can solve extreme financial problems, it’s hard on your client’s credit history and may mean surrendering possessions to a trustee.

The most common causes are job loss, divorce or separation, and medical problems, since being off work for months with reduced income makes it harder to service debts. A personal business failure or crushing student loans are other reasons people declare bankruptcy.

If a client’s having financial trouble, remind her she’s not alone. First, find out if most of her debt is credit-card related. If so, she’s likely paying a very high interest rate. Instead of giving her a hard time about paying so much interest, ask if she’d be interested in exploring a debt-consolidation loan or consumer proposal.

Then, look at her assets. Review with her the tax implications of de-registering money from her RRSP; the withdrawal rules of TFSAs; and how capital gains and losses are incurred by selling stocks.

Next, refer her to accountants, lawyers and real estate agents that specialize in bankruptcy. A good bankruptcy professional will suggest ways to avoid default. Showing her there are other ways out will help her feel more comfortable.

How do you get her back on track?

Ask

Are there ways to reduce your expenses?

Not

What were you thinking?

Ask

How would you like to start dealing with this?

Not

Do you want to wait it out and see what happens?

Ask

Would you like the name of a bankruptcy trustee who can help you find the best option?

Not

Do you really think you can figure this out on your own?

But if bankruptcy is the best option, warm her to the possibility while withholding judgment. It can be embarrassing for a client to admit she’s in trouble, especially if the reason was beyond her control. Try not to make her feel guilty—instead, tell her it’s a learning experience. Offer to connect her to a seminar about budgeting and personal finance, and give some of your own pointers so she can start rebuilding her credit.

Bankruptcy stats

77,993 consumer bankruptcies in 2011; increase of 121.5% since 1990

3,643 business bankruptcies in 2011; decrease of 68.7% since 1990

Consumer proposals increase 5.2% for year-ending November 2012

Source: BankruptcyCanada.com

Rosemary Smyth is a Victoria-based coach with Rosemary Smyth & Associates and author of 101 Success Tips and Strategies for Financial Advisors.