If it seems to you like there are two sets of rules in this world – one for the haves and one for everyone else, well, you’re not alone.
One of the places we see this discrepancy is when we lose everything, and are forced to file bankruptcy.
How is it that a rich person can go bankrupt multiple times and still receive loans and start new companies but if the average person declares bankruptcies they’re basically blacklisted for years and their credit is ruined?
byu/domo018red inNoStupidQuestions
A regular person is looking at 7-13 years of rebuilding their financial life.
A rich person is looking for a loan that will get them through to their next huge embarrassing failure.
If you’ve ever wondered why, this thread is for you!
17. They’re rich for a reason.
It’s all in how s/he organizes their business. A corporation is fully separate from the owner (shareholder), and in court and for tax purposes, they are treated like a separate person, which is why you file a corporate tax return.
In other words, a corporation can go bankrupt, but that will have little bearing on the owner (shareholder). Corporations have the privilege of being able to file for Chapter 11 Bankruptcy which simply allows the corporation to reorganize the company, whereas individuals can only file Chapter 7 (liquidate all your assets to discharge all your debts) or Chapter 13 (3 to 5 year repayment plan that discharges your debts). Both have a negative impact on an individual’s credit score.
In other words, rich people are rich because they know tax and business law better and take full advantage.
16. They’re protected.
The person didn’t declare bankruptcy, the corporation that the person owned declared bankruptcy.
This prevents the majority of the negative effects of bankruptcy from affecting the owner.
15. PR spin can do a lot.
There are vanishingly few chapter 11s that aren’t the result of some form of major failure or another. People put a lot of spin on what a filing really means for PR purposes, but believe me, a company does not undertake the incredibly expensive, painful, and laborious step of actually filing unless catastrophe is imminent or has already occurred.
The end result in the vast majority of these cases is that the owners (shareholders) are wiped out. Either a bankruptcy sale will happen, the proceeds of which run out in the middle of the capital stack long before reaching the shareholders, or some class of creditors will receive all of the equity in the reorganized debtor as partial satisfaction of the debt.
It’s true that chapter 11 rarely means the end of the business, but almost always, someone is getting megaf**ked in a chapter 11; the shareholders, then the unsecured creditors, in that order.
14. The system is rigged.
Yes this. But there is also something in the credit scoring algorithms that puts people into different buckets. For example, when I worked in real estate had 2 applicants for a place with the same low credit score of around 600.
One was 20 years old, really had no significant debt and defaulted on like a $60 dollar credit card bill out of probably pure negligence (her mom would be cosigning for the place)
The other guy bought and flipped properties, fell under water (this was around 2009) and defaulted on over $1m in loans. Same credit score.
13. Straight predatory.
I would actually say it’s not true that bankruptcy gets you blacklisted quite the contrary because your debt gets locked in for 7 years because you can’t file again for 7 years.
A lot of times a few months after someone files they get a lot of offers from credit card companies
12. There should be space for details.
This is something that’s frustrated me my whole life.
My credit isn’t good. But I messed it up keeping a roof over my head in college and beyond.
But my score gets looked at the same as some kid who signed up for credit cards and blew all the money on booze and trips and clothes.
Mine was spent on cheap rent and utilities and healthcare. I’m working my a$s off to fix it, and I will, I just wish there were more to it.
11. We don’t use the same applications.
Well, a lot of financing that rich people get is private investment, not bank loans.
So they’re not trying to convince a bank with a credit rating, they’re trying to convince investors with a value proposition.
10. It’s not personal.
This. Financial institutions are not the morality/personal choice police, all they care about is whether you pay or not and if you did that’s great and if you didn’t that’s bad.
If you defaulted on a debt because you had bad luck and had no choice but to do so to stay alive it’s the exact same result for them as someone that defaulted on a similar sized debt but for something else, like strippers, so you’ll be treated equally.
There’s nothing inherently “better” about someone that couldn’t pay out of desperation vs. someone that couldn’t pay out of mismanagement.
9. It’s all in who you know.
Rich/wealthy people use private banking when they use banks.
Credit scores don’t matter much in private banking.
If a rich person wants to finance a 10 million dollar mortgage and has a 100 million dollar investment account with the bank, they’re going to give him/her the loan without caring about anything other than the other outstanding debts that person has.
8. It depends.
This only works for some businesses though, right?
A corporation (like Toys R Us) can easily claim bankruptcy without directly affecting the individuals who are a part of the corporation.
In the case of a proprietorship (like a locally owned and operated store), for example, since the liability of the business is directly tied to the individual owner, wouldn’t that affect their financial standing as well?
7. Who cares about treason?
Or they are financed by Russian mafia who pay a fee to launder money through businesses.
When you have such a bad track record that no one will lend to you any more, you make deals that allow you to still make money on shitty businesses by laundering.
Or you get a “legit” loan through Deutschebank with ties to Russian mobsters.
6. It’s shady as heck.
Fun fact, this is why subcompanies exist too. most property companies will file each building as it’s own company eg. 123 Main St, LLC. and operate it as part of their business and just have that one declare bankruptcy if something drastic goes wrong.
The shadiest example of this is mining companies putting mines into separate companies when they go bust so that they don’t have to deal with the cleanup costs.
“That mine doesn’t belong to MegaCoal anymore, it is property of Toxic Pit, LLC! and Toxic Pit LLC would love to follow the legal steps and cleanup for the property, but they have approximately zero assets or money! Oh well, Toxic Pit is bust! I guess the government has to deal with it now!”
5. Must be nice.
In college I knew a girl who worked for a millionaire. He told her he’d made money and lost it several times. His advice to her was you never use your own money to make money, you use someone else’s.
Hence, as others have pointed out, a corporation that has people buying into it as an investment can go under and there is a separation between the corporation and the individual. This is not talking about a mom and pop gas station but larger businesses.
4. When the bank gambles.
Something I read a while ago on here…
“Take a thousand dollar loan, you worry.
Take a million dollar loan, both you and the bank worry.
Take a billion dollar loan, the bank worries.”
If I fail to repay the thousand dollar loan, the bank will come down heavy on me and I will either pay it or my wages get garnished until the entire loan (plus interest) is paid.
If I fail to pay back the billion dollar loan, the bank will work WITH me because they don’t want to take a massive hit.
3. It’s a classic for a reason.
It’s an old joke:
If you have $10,000 in debt, that’s your problem.
If you have $10,000,000,000 in debt, that’s the bank’s problem.
2. An interesting take.
There was a lot of impact on World War 1 about supporting a country at war for the survival of the country because they owe you money.
If you owe the bank money, the bank controls you. But if you owe the bank enough money, you control the bank. At that point the bank has an interest if your survival
1. Find the right loan officer.
I’m in financial services and here is the basics on this. Most lenders yes would blacklist the individual. But it also depends on the lender and the type of lending being done. Some lenders charge more (higher interest rates) for the added risk and others specialize in Asset Based lending, in which they don’t care about the individual but just the assets.
In most cases, real estate being the most valuable. Many cookie cutter lenders like the big 4 would not touch someone with a 10ft pool that has a BK, but that doesn’t mean someone won’t. There is a lender for everyone out there. Just need to find one.
I don’t know why the world is the way it is, but sometimes I really want off.
Do you think this is fair? Is there any way to change it?
Drop your thoughts in the comments!
