Bankruptcy Story #109
Alison and Patrick’s two children had grown up and moved out. They were living comfortably with two modest incomes, a nest egg and a shrinking mortgage. They had talked for years about starting a small business together. Alison was a qualified therapist and Patrick would manage the business and keep his job part time. They had worked out everything, the business plan was immaculate and the bank gave them a second mortgage to get started. They set up a limited company and had to sign both property and equipment leases-these had personal guarantees attached to them. The business started and everything was going well.
Two years later they signed all leases again, the business was almost running itself and Patrick was happy working his old job part time. A month later a rival business moved in and the council changed all the local street parking to a half hour limit and strongly enforced it. Their clientele decreased rapidly. The business closed 4 months later, after they had used all their savings and sold their car. The company went into liquidation, but there were still the personal guarantees totalling $128,000. The equity in the property was used to pay creditors and left $39,000 owing that they were both liable for. The stress took its toll, Alison went on the sick leave, Patrick managed to pick up good paying full time work but could not meet all the debts.
What could they have done?
Recognize the warning signs of why a bank would demand you personally guarantee a loan. The business plan did not take into account competition and potential parking problems.
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