California man turns to Dave Ramsey after failed business deal cost him $2M — where Ramsey says he went wrong
Jeremy from Los Angeles is only 23 years old, but he has been running his own business for nearly two years. He told Ramsey and co-host John Delony that he took on a larger-than-normal job without asking for any payments up front. He poured $2.1 million into the project — expecting a $2.4 million payout — but the client filed for Chapter 7 bankruptcy, leaving Jeremy in the lurch and $280,000 in debt.
How did The Ramsey Show host react?
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'There's no amount of business that's worth putting everything on the line for it,' Ramsey said in a clip posted Aug. 4.
An emotional Jeremy wondered whether he should file for bankruptcy himself or take on more debt to continue working jobs and try digging himself out of this hole. Ramsey offered him a third option.
Getting back on track
Jeremy admitted he was willing to take lower margin jobs and foot the bill for his early clients because he didn't have a reputation to lean on as a new business owner.
'You've done amazing things for somebody your age, even though you stepped in a big old bear trap and it ripped your leg off,' Ramsey responded.
He advised Jeremy to learn from this harsh lesson, and find a way to get his business back on track — without going further into debt. Instead of 'being the bank' for these clients, Ramsey said, he needs to learn how to work out payment schedules so that clients are paying for materials and the cost of labor as the project progresses. This minimizes the risk if the client is eventually unable to pay.
'The industry standard is you don't do that crap, because you go bankrupt when they go bankrupt,' Ramsey said of Jeremy's previous method. 'That's the problem, you had bad business practices.'
Delony pointed out that Jeremy's reputation should be less of a concern since he'd completed around 30 jobs at this point.
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'You can't find 29 other people to say, 'this guy's good?'' Delony asked. 'Your reputation is much better than you think.'
Jeremy ended the call with Ramsey and Delony encouraging him to keep working towards paying down his debt while ensuring his future clients pay for the work as the job progresses.
Deciding on bankruptcy
In general, there are three types of bankruptcy available for businesses. Chapter 7, or 'liquidation bankruptcy,' involves selling off assets to pay creditors. It can be filed by individuals or businesses. Filing for Chapter 7 may require a 'means test,' which is used to ensure the debtor meets the financial criteria. In Chapter 11 bankruptcy, the business is reorganized to create a repayment plan, and is allowed to remain operational in order to pay the installments. Chapter 13 bankruptcy is typically for individuals but can include sole proprietors. It allows individuals to restructure their debts into a payment plan, usually in a three-to-five year term, agreed on by creditors.
To file for bankruptcy, a business must petition the court and pay the filing fees. From the point of the filing, creditors can no longer take legal action against the filer, and the court will determine the legitimacy of their case. The filer will meet with a trustee and creditors in order to testify to their claims.
While bankruptcy can have its benefits, including providing relief to small business owners or a chance to regain profitability, it doesn't exactly provide a clean slate. Filing for bankruptcy can tank an owner's credit score — severely affecting their ability to borrow — and put their assets in jeopardy. Chapter 7 and Chapter 11 bankruptcies will stay on your credit report for 10 years, while a Chapter 13 bankruptcy will do so for seven years.
It's often a good idea to explore all options available before resorting to bankruptcy. Working with an experienced accountant or financial advisor can help you understand the different paths that can be taken and help decide which is most suitable for you. They can also help you create a plan to get back on track as quickly as possible.
'I think you need to believe in you again. You did a lot of things smart, and you did two things dumb,' Ramsey told Jeremy. 'One was you believed that debt was your way up, and two was you bet the farm on one company.'
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