SCOTUS And Responsibility

 
US Supreme CourtThe headline made it sound like homeowners were getting screwed by the Supreme Court. “Supreme Court Hands Defeat to Struggling Homeowners” it said.

Here is how I would have written the same headline: “Supreme Court Says Pay What You Owe.”

In a 9-0 decision the court said that when a homeowner is underwater, secondary loans such as home equity loans and second mortgages, cannot be automatically discharged, simply stripped off, in chapter 7 bankruptcy.

I have written a lot about the housing crash and the people who were reckless, who put instant gratification above security and common sense.

Stupidity, greed, or a lack of knowledge is no excuse. If you sign a document and take the loan, you have an obligation to pay it back.

Bankruptcy exists to help people who get in trouble and is used correctly every day. The court’s decision doesn’t say that these loans can never be discharged, just that it’s not an automatic thing. Why should it be?

Sophisticated financial transactions are available to everyone but too many people don’t take them seriously enough. Too many people don’t give themselves any wiggle room, don’t plan for the unexpected. As I say in What Next, “it’s not the plan for the expected that saves you, it’s the plan for the unexpected that does.”

Here are my rules of thumb:

If you can’t afford 20% down, you can’t afford the house

If you can’t afford the mortgage on one salary, you can’t afford the house

If you take a second mortgage you should be able to pay it off quickly

If you take a a home equity loan it should be related to the house, not for something like a car or boat

Are some of these difficult to get to? Yes, but sticking to these rules will set you up for success down the road.

 


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Are You Profitable?

 
Stack of cashAs a business owner you hear this question or one like it all the time. It starts as small talk – how’s business? – is usually the first question. Fairly quickly, because they want you to succeed, they’ll ask if you’re breaking even or making a profit.

If they’re asking that question then they probably haven’t been in business themselves because the answer is rather complicated.

Start-up costs are huge and can’t be recovered in a short time. While that money isn’t all out of pocket, loans need to be paid back and the term for business loans are not very long, 5-7 years, so payments are fairly high. I’ve had people ask me if my business was profitable after I was only open a few months. That’s the field of dreams concept of business, if you build it they will come, as if customers flood you with money the moment your doors open.

In addition to start-up costs there are the operational costs and, with a slow (but hopefully steady) increase in business, the money to keep things going needs to come from somewhere. Since it’s not coming from customers it has to come from the owner or investors. It’s called the burn rate and needs to be watched closely. There were plenty of weeks and months that I had to add cash to cover payroll, loan payments, or marketing expenses.

I have indeed seen businesses reach profitability in a short period of time but that’s the exception.

Patience and attention to all aspects of the business, revenue, expenses, marketing, and staff are the key things the entrepreneur needs to focus on. If there is progress then profits will come. Owning a business is a long-term prospect and success doesn’t come over night.

So my response to people who ask me these questions is: “If only it were that quick and easy everyone would own a business.”

What’s your response? Add your comment below.


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