The last few weeks have seen a sharp uptick in articles warning of a possible recession due to an inverted yield curve. An inverted yield curve is when interest paid on short term bonds is higher than interest paid on long term bonds. This suggests that investors are greatly worried about the short term. Every recession in the past 70 years has been preceded by an inverted yield curve.
Setting aside the yield curve, we all know that nothing good lasts forever and the economic cycle will eventually turn. Are you prepared?
The 2008 recession was a boon to our firm’s asset protection practice with a threefold increase in business between 2008 and 2012. Almost all of the clients we represented during that time were unprepared for the recession and the collapsing real estate market. The majority of these clients sought asset protection because of outstanding personal guarantees, while others were facing lawsuits related to a collapsing business or investment fund. Allow me to explain and offer a few pointers on how to prepare.
When markets are rising and the economy is expanding, real estate investors, real estate developers, and business owners are happy to sign personal guarantees. So long as the real estate market keeps going up, there are few defaults. So long as the economy keeps expanding, bankruptcies are down and there are more successful businesses.
Once the economy turns and the real estate market starts sliding, personal guaranty exposure becomes real. Banks tighten up on credit, making it more difficult to complete ongoing projects or start new projects. Lines of credit are harder to come by when sales are down. Tenants go out of business and shopping center landlords find themselves in the hole. Workers lose their jobs and apartment building owners have a higher vacancy or default rate.
Once projects and businesses start experiencing serious cash flow problems, or the value of a development drops below the outstanding debt, investors and operators may want to walk away from that business or development. But you cannot walk away if you signed a personal guaranty.
When there is a personal guaranty in place, the lender has the right to pursue the personal assets of the guarantor if there is an event of default. Following the 2008 recession we saw hundreds of clients facing personal guaranty calls. These clients were not only losing their businesses and their real estate, their personal assets were on the line—homes, rental properties, investment accounts, art collections and everything else that they had set aside for retirement.
Over the past eleven years we have seen creditors become more aggressive and more intelligent in pursuing debt collection and enforcing personal guarantees. This means that waiting for default and then protecting your personal assets may not work in 2019 and onward. You have to plan now, well ahead of any possible default. Asset protection works best when you technically do not need it.
Plan now for the possibility of default. Plan now for the possibility of failure. Think of it as insurance—just in case things do not work out the way you envision. Interestingly, if you are going to protect your personal assets now, well ahead of default, you can utilize much simpler and less expensive structures and they will be much more effective than the most complex offshore structures implemented last minute.
It is ok to hope for the best, but hope is not a strategy. Plan for the worst-case scenario. You have worked hard your entire life to accumulate what you have. How hard should you be fighting to keep what you have?
