Discussion:Advice on business debt in tax practice

I’m embarrassed to even discuss this topic, but I think I could benefit from the advice of other professionals. I’m a CPA, but I’m mine own worst accountant! In the past two years I marketed my firm using one of those outside marketing firms. I have incurred close to 150K in debt which includes the marketing, asset purchases and working capital. I have one employee and the monthly income covers the overhead and my debt servicing. My problem is that I have a medical condition that is forcing me to cut back on the growth I need in the practice in order to start making some money so I can payoff my debt and start paying myself. I have fallen behind on work and have not been bringing money in to keep things going. I have borrowed money to pay other debt which is just making the situation worse for me. I really need some advice. I’ve considered using one of those debt relief companies, but you need to be behind in payments. There will be a negative effect on my credit score really so anyway. I am really depressed and upset with myself about the situation that I have created. I’m thinking of quitting. I really don’t know what to do. Any recommendations would be welcome.

John Huddleston Seattle Bellevue Tax Accountant

Cindylee doesn't say where she's from but in the Tampa area Dave Ramsey is on a regular AM talk station along with O'Reilly, Neil Bortz and Chris Miller (sorry about the spelling guys). His website is daveramsey.com. He's also on Fox's Business Channel (TV).

The first thing I would do is take a really, REALLY, hard look at your own firm and keep an open mind. I would start with the client list and see what clients are more profitable than others. Maybe it would be possible to let some of your so so clients go and keep your profitable clients and cut your only employee. Take a hard look at your overhead costs. Do you use the most expensive tax software? Do you need to? Do you lease your office space? Maybe you could work out of your house for awhile until you get the debt paid off?

You could consider selling your practice and working for the buyer as a consultant on your clients for a few years. You could use the W-2 to live on and use the royalty payments to pay off your debt. There are brokers out there that can help you sell your practice. Then, once you get back on your feet you can either work for someone else or lick your wounds and give it a second try on your own with some new knowledge.

I guess the bottom line is try not be depressed. Being depressed only makes things worse and life is too short to be depressed. Take the bull by the horns and solve the problem. I wish you luck.

Cindylee, some advice:

1) Focus on your health first. The rest is just stuff and more stuff.

2) If you go with the Consumer Credit Counseling Service, just be aware that as far as lenders are concerned (moreso since this 'credit crisis' started) you will be treated as though you filed bankruptcy when trying to buy a home. Your interest rates for other consumer borrowing will also increase. Not a deal breaker, especially if you are SURE you won't be buying a home or cars.

3) Get a parent, friend, or other confidant to handle your business affairs for a little while or at least provide you some guidance. You do not have the clear perspective--during times of crisis--that you need to make clear decisions.

Godspeed, and I wish you the best.

Michael

1) Establish a beginning emergency fund of $1,000

2) Get current on your debts

3) List your debts smallest to largest (generally disregard interest rate in the list)

4) Make a zero-dollar based budget and include minimum payments on all debt except your smallest debt.

5) Pay your debts as part of your monthly budget smallest to largest, which creates not only a snowball effect as you add the minimum on the debt you paid off last to the next smallest debt but it also gives you an instant gratification and a feeling you are accomplishing something. Keep going until all debt is paid off.

6) Build your emergency fund to 3-6 months of expenses (based on your personal risk factors for catastrophy).

7) Begin or re-start your retirement saving in the following order: 401-K up to the employer match, then max out a Roth for yourself and spouse, then back to the 401-K until you reach 15% of your income. Invest in good growth stock mutual funds, no individual stocks.

8) Save for kid's college savings based on what you want to provide.

9) Begin paying off the mortgage aggressively.

10) Live the good life and give lots of money away

Would to God that I would have found this program 15 years ago when I got married, I would probably have a net worth of about $1,000,000 and no debt. But instead, I am the same schlep as everyone else, basically broke and in debt (although not that much as I have been working his plan for about a year now).

Bottomline....live on less than you make, don't go into debt, and learn to say no. More or less what your grandparents probably did.

Michael

I wouldn't be so hard on myself Newarcher. The fact that you might not have done "better" probably has a lot more to do with the fact that you were 15 years YOUNGER. I think we'd all make a few different decisions looking back on things!!!

You don't really need Dave. All Dave does is put your grandmother's common sense regarding money into a 'program' that is easy to duplicate and follow. People do better when they can spend a little time organizing up front and then autopilot. Dave isn't one of those late night tape guys, he is real and even encourages people in debt to get his book, "the total money makeover" from the public library.

Kids these days are graduated from our finest high schools not knowing how to balance a check book, let alone do personal budgeting. Fiscal responsibility is a think of the past with our 'gotta have it now at any price' generation.

Dave's plan simply makes you be deliberate with your money and make a firm budget at the beginning of each month that you stick to (forced living within your means). No cult or guru to it. Plus the Radio program he has is very entertaining.

I was young and dumb, unfortuately. However, I had a good time with the money we spent. I just wish I would have known this information way back when before we had kids and my wife quit work.

Michael

I think that a few of us may be a bit more helpful with suggestions if you can provide more details on your situation including how much is the secured vs unsecured debt?

Again, I'm guessing that the marketing firm was overpriced and ineffective so, I'd deal with them aggressively. As far as the equipment is concerned I'd see if I could work out lower payment terms with whoever financed those purchases and whatever is on the line/term debt I guess I'd take a second look at my cash flow after I see what can be done with the unsecured items.

Depending on where I'm at after I negotiate with the unsecured folks I'd look at a few options including:

Talk with my bank and see if I can work out payments to coincide w/cash flow or some other work-out type of scenario.

I like the idea of selling part/all of the practice, especially if your health is bad, and in light of the fact that this is probably a good time of year to sell.

I also like the idea of bringing in a stronger skilled person and considering taking on more work...if you can command the fees and have the health/energy to do so.

On the other hand, if the marketing assistance really was fair ...I would still see if I could work out a deal to charge off some of the fees and extend the payment period to accomodate your cash flow...I'd just be a little nicer about it (dealing with them) than I normally am.

I find it "curious" to say the least as to how $150K of business debt was incurred in just two years especially, when it sounds like you have a small practice...that just makes me suspect about the value of what you've been charged for variuos things.

Don't feel bad about this...pretty much all of us have fallen on hard times at one point or another. And you can bet your bottom dollar that just about all of us have been strung-out by clients/customers. I know in our various businesses we routinely have to work with our cutomer's cash flow issues - just ask anyone who's had to deal with the US auto industry over the past few years...talk about getting strung out on payments, offering discounts, reduced prices, write offs from Delphi/others and so forth and unfortunately, it's more common than not. Yet, a lot of them hang in there and bounce back (how many times in the past ten years has GM been on the brink and just recently their CEO (Waggoner) would have you believe their climbing back to glory).

As long as you wake up tomorrow...in as good as health as you can muster you'll be fine...everything else is just not as important...deal with your situation as best as you can with your head held up.

Jellegate, all good advice....and I think you are right. With what little I know, I would focus on the equipment and tell the marketing folks to go hug a tree. The equipment is secured and (I assume) that you use it in the business and your business would be adversely affected if it were repossessed. I would not pay the marketing clowns until last unless you secured these debts with your home.

Going forward, I would strongly advise you to bounce purchase decisions off at LEAST two different people and if you can find a grey haired Accountant or CPA who has been in the game for a long time willing to give advice, weigh theirs heavier than everyone elses.

Michael

Cindy - I would agree with some of the others above to tell these "great" marketers to pound sand.

For anyone looking to use an outside marketing firm, I think you really need to look at the contract to determine if there is any "guarantees" of business that would offset their fees. I won't do this in the future and I wish I would have had a lawyer take a quick glance at the agreement.

No, Dave's advice is neither new or innovative. That being said, Dave is the only financial advisor who puts it together in an understandable way for the average financially illiterate American. He also bucks the system quite a bit.

It is funny (aka sad) that the 'sophisticated' financial advisors will tell some poor schlep not to pay off his home because the rates are so low that he can invest that money in the stock market and make a spread of 8%. Of course, they don't adjust that for risk.

It is SAD when some 'financial advisor' tells someone not to pay off their home because they need the tax deduction......

Dave's advise is probably the sage advice that your grandpappy or granny would give you if you asked. You know, those 'unsophisticated' and 'antiquated' financial types. Only which group--the sophisticates or the juvenile types--are having their homes foreclosed on because of adjusting interest rates and have 20% less in their portfolios since 1/1/2008? Who is sleeping well and who isn't?

I suggest everyone who reads this at least consider Dave Ramsey's advice....he isn't selling tapes (he sells books you can get for $10 on sale directly from his company) and he dolls out free advice that works.

Michael

I've always believed that preserving options is the best course in life. Pay down the mortgage and you have cut off one of your options.

I would tend to agree with you--conditionally and in very few instances. When my wife quit work to stay home with the kids, I had paid down all of my debt (except for the new truck) and I had credit cards in place (as a last resort) with a sizeable emergency fund. I am pretty disciplined but still went through the emergency fund methodically. Now I am faced with coming up with additional income (why I am trying to start this Accounting and Tax business) or tapping the credit cards. Seeing that the credit cards are only an absolute emergency tool at best absent additional income, I chose to try to increase revenue incoming. However, many others do not.

Stop gaps help but if a person enters retirement with a house payment and no reserves for cars and roofs, etc. then you are throwing a match into tinder with the equity line. I wouldn't consider such a person as a good candidate for the equity line for a couple of reasons. 1) they clearly don't have a plan (evidence as entering retirement with a mortgage) or have hit other hard times that aren't improving and 2) with the equity line sitting there, they would likely end up maxing out that equity line and ending up in worse trouble. If they are that tight that they can't pre-save for a new car or roof, the equity line payments on the roof would do them in. If they can afford to pre-save for the car or roof but aren't organized and aren't planning well enough to accomplish that...well, again trouble. Really all we are talking about between pre-saving for the roof or car and the equity line purchase of the car/roof is the interest. If they can't afford to pre-save for the roof or car then they certainly can't make that same payment along with the interest on it. This sounds like disaster to me personally.

IMHO, they would be better off with a credit card with a higher limit as that is not secured and they can't lose their home over a credit card debt. Also, in worst cases, credit cards can be bankrupted or settled for pennies on the dollar whereas secured debt (unless overleveraged) cannot without selling the home.

Just my two cents but I think I could find much better and much more 'self-proof' ways to go other than a home equity line of credit that just screams "European Vacation" for the undisciplined. You know your clients better than I do but just using the generic example you gave, it sounds pretty risky. Again, not schooling the school master or being smart, just discussing philosophy.

Michael

You sound like a very good client advocate....your clients are very lucky to have you on their side.

But I think that of pretty much everyone I met on these boards!

Michael

My mistake....reading comprehension problem after spending two freezing wet days with 200 boy scouts aboard an all metal aircraft carrier!....my mistake, sorry.

Then I completely agree with you that it is a good idea to have that in place, especially with the rising costs of healthcare. ESPECIALLY for people who retire before Medicare kicks in and they face large costs of heatlhcare.

Michael

I still have some catching up to do on tax returns that were filed with extensions. My focus on work has still not been easy due to the medications and stress levels that I'm still dealing with at this time. Last week and this week have not been productive for me. I can’t seem to stay focused which in turn causes me to be more behind. It is a vicious cycle.

I’m still considering my options. I need to make the time to put in on paper and discuss it with someone. I just tried to get help from the Legal Aid Society but I found out that they take my fiancé’s income into consideration so I would not be eligible for their help anyway. He has done so much for me already and I hate to ask him for money for a consultation with a BK attorney, but I think I will need to after all.

I’m at home writing this and my assistant just called to remind me that I was supposed to see a client at 10AM. It is 10:15 AM and I’m not in any condition to see anyone right now. I hate that the meds screw up my short term memory so bad!

I’ve been thinking of getting a “real job” again, but because of my health issues that hasn’t been something that I’ve looked into at this time. Anyway, my fiancé is getting ready to retire and he and I really like the flexibility that I have with my hours now. It is also very helpful since I help take care of my father. By the way he ended in the hospital right after the New Year and needed surgery which kept him from being able to drive for several months. He is better now, but this is fifth or sixth time in three years that he has needed extended help like this which would make it difficult to maintain a regular working schedule.

My ideal situation is to figure how to run my practice better assuming that I keep it going right now. I have many people counting on me and I don’t want to let them down. I also have the BEST employee and friend. She knows all about the difficulties that I’m facing and she has stuck by me. She is way underpaid, but considering the circumstances she considers some of the flexibility and understanding that I offer as an additional benefit that is worth something. Plus, we have an office in a great little building of executive suites. The people are great! It is like a little family there and I would like to keep the office and my employee. The reality of the situation is that I may have to give up both.

Well, I’ve gone on long enough. I need to put myself together and get to the office and try to get some work done. Thanks for letting my vent!

I'd like to touch on one other issue for all to consider: many people in this circumstance will have to wait for a "medical event" to occur before they BR, so that the bills can be included in the BR. Oh? Why don't they just buy health insurance? A: Uninsurable at any price. It's a sin, in my opinion, just a sinful as anything there is. Good luck.

If you decide to sell, remember that you can always start another business later on.

I gave up a healthy income several years ago to take care of some of my own medical issues. When I got back in the game, my father became ill, and I spent 2 years taking care of him. Then my mother became ill, and we're still working on keeping her well. I don't make nearly the money I used to, but I have had the flexibility to take care of my personal issues, as well as my parents, and I wouldn't trade it for anything. I completely understand when you struggle with getting a regular job and giving up that flexibility, as I have that conversation with myself on a regular basis. I'd love to have real office space, but I work out of my home (when I'm not on client site), and my husband and I have gone without real vacations for many years. But we have a cabin that we escape to when we can and the simple life suits us just fine. There's been lots of great advice out here for you, but I'll add to trust your gut on the personal issues.

And, oh, be real upfront with the fiance about your situation (but you've probably already done that).

To all - I have a related question. I am trying to help out my niece who is a young single mom. She has about $20K (at 7.25%) in student loan debt. She has an ok job now, but fell behind while pregnant and trying to get her bearings as a new mom where the father is skipping from job to job to avoid child support. I thank God that I've never had to deal with this kind of financial situation, but that makes me not necessarily the best at helping her get out of it. She'd like to pay $50/mo on her loan, but they told her that won't even cover the interest. Can someone point me in a direction to look at to help her? The county gave her the name of someone at Lutheran Social Services, and I'm thinking that would be a good start. Any ideas?

Your inability to concentrate is a sign of "nerves" and even depression, and that's a serious illness. Treat it like any other illness, and try to get treatment. Even free or reduced rate pastoral counseling may be of help if you don't have insurance. There may be numbers you can call: county and state. If you are already under treatment, tell your doctor you are not able to concentrate. If it's really bad, go to the ER, they are taught to take depression seriously now days. They will help, then provide you with a referral.

The fact you are doing something to get out of this, and to move ahead will itself act as a tonic. Good luck!