Why Going Broke Is Only For Poor People - How Money Works

Rappers, boxers and even former presidents have all gone bankrupt at one point or another and yet, outwardly, it looks like nothing has changed for them. Worse still there are people like Jordan Belfort who have been forced into bankruptcy because of the criminal nature of their fortunes, yet today are still living lives that you or I could only dream of.

So what gives? Are the rules different for the rich even when they are going broke? Or is this just another example of rich people using their army of lawyers to get out of taking responsibility.

Well, believe it or not it’s actually so much worse than that.

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Music by Epidemic Sound

Stock footage by Storyblocks

[michaelphilip]

There's a famous saying. "If you owe the bank a million dollars, You have a problem. If you owe the bank a billion dollars, they have a problem"

[FEffort]

Turns out, It's pretty expensive to be poor

[luisandrade]

Tldw: rich people usually don’t go bankrupt their companies do and even when they do they can usually reorganize their debts rather then liquidate assets like regular people

[theyjustwantyourmoney]

This explains why it's always an overkill on the poor whilst high profile cases seem to have many loopholes available for an easy escape.

[dan]

While an LLC may protect your personal assets, good luck getting an unsecured small business loan from a bank without signing a personal guarantee.

[jessebigfoot]

I work for a commercial real estate lender, which regularly makes loans in the mid-8 figure range. I've been directly involved in bankruptcies, particularly Chapter 11. This video, while not entirely wrong, takes some significant liberties. 1) Lenders actually require separate companies for real estate transactions. These are called bankruptcy-remote single purpose entities (SPEs). They are set-up to own one property (single purpose) and are designed to ensure that if the owners go bankrupt themselves, the entity won't be pulled into it and so can continue to manage the property (bankruptcy-remote). 2) Lenders will not lend to a company without some "warm body, " a real, flesh and blood human who owns the company which owns the property, agreeing to a degree of liability with respect to the loan. At a minimum, this person will be liable if the company does bad things (such as incurring additional debt without consent of the lender). Typically this person will also agree to be liable if the project isn't completed (so they can be on the hook for cost overruns and the cost to complete), if there are environmental problems requiring remediation, and to ensure taxes and insurance are paid. 3) Having your companies go bankrupt still has consequences. Even very rich people can find obtaining new loans more difficult and/or expensive if they have bankruptcies in their past, even if those were of their companies and not them personally. Of course very rich people are always better able to survive financial problems because they have more resources available to them, but that's not really the fault of bankruptcy law. That's the fault of capitalism. 4) Debtors, even rich ones, often lose out in bankruptcies. For a successful reorganization, there has to be valuable assets that are not too encumbered with debt. As one can imagine, most companies in this situation don't need to file for bankruptcy. Most Chapter 11 bankruptcies, particularly with SPEs, involve a battle between the primary lender (which typically has a mortgage on the SPE's property) and the SPE itself along with their owners. Lenders don't always lose these battles, in fact they often end up winning them. Creditors have a lot of leverage in a bankruptcy. They lose a lot too, but not always or even most of the time.

[genito]

8:11 "if you want to experience bankruptcy first hand..." 😂💀

[maxxon]

What bank will loan $1 million to a company with $100 capital?
None... without a guarantor. They'll make you guarantee your business loan with your personal assets.
And THAT'S how you lose your shirt when your company goes under.
(Been there done that)

[kamerondonaldson]

i would rather be broke than in debt. if you're in debt you have less than nothing and are obligated to be someones slave free of charge until the negative value goes back to zero.

[MustafaAli-lbdq]

This channel is very underrated regarding business and finance.

[cedm]

I think an important aspect glossed over is how money is raised for investments and the corresponding debt piece. Specifically two points. First, not all signators/guarantors for a debt are fully liable because often the collateral of an underlying asset(securable) and the relative risk off-set the need for a personal guarantee (unlike a personal line of credit or SBA), this isn’t exclusive to an LLC. Second, your example with construction LLCs is true in terms of limiting risk to other projects, but often applies to stable assets because syndicated LLCs are far easier to raise money on a per asset basis than with other filings.

I am generalizing with my input and likely missed a detail or two 👍 still great content as always!

[adamhenriksson]

You don't have to go into bankruptcy to re-negotiate your outstanding debt. "Normal people" can re-negotiate their debt too, cause, believe it or not, banks would probably like to receive steady re-payments on less favourable terms than deal with having to repossess your house. Wouldn't be surprised if banks earn more when loans are re-negotiated for a longer repayment duration compared to having to write off part of the loan to pay creditors.

[dgriffinctc]

I normally love your videos but this one is flawed outright from the outset.

First a correction on 13 and 7. Chapter 13 is NOT a "luxury of the rich". Often times 13 is actually a failed attempt at 7. There's a thing called a means test where the court forces a party to restructure in Ch 13 if they have the means to pay off their debts. This prevents more capable applicants from simply walking away.

That said, you were so close to being right when you talked about corporate structures. Bankruptcy does not exist so people can rip off lenders by writing off their consumer debts. It exists to imcentivize risk taking. If you take out a loan to invest in an company or product, something absolutely needed for the economy to run, bankruptcy allows you a way to protect your personal assets.

If BK didn't exist, only those with sufficient wealth to bootstrap a business would be able to capitalize on innovations and even they would be substantially more risk averse.

Yes, like anything it can be abused and yes, like anything the wealthier the party, the more they can benefit. However, it's an injustice that a guy who defaults on 20k in unsecured debt can simply BK out of it, not an injustice because he lacks the assets to need risk mitigation strategies.

[giovanniriccardovigano]

Hi HMW. I've always loved your videos, and this is by far no exception. Thanks to you I got really more interested in how certain things should be organized, and especially how much attention the financial aspect of everything requires. In this video, you mentioned briefly about how the real estate market keeps working thanks to always having a different society for each construction project, and it really seemed interesting to me. Could you do a follow-up video more concerning this aspect? I think it could be very appreciated by all the subscribers. Thanks!

[aarondaniels]

I'm not even kidding when I say that the market crash and high inflation have me really stressed out and worried about retirement. I've been in the red for a while now and although people say these crisis has it perks, I'm losing my mind but I get it, Investing is a long-term game, so I try to focus on the long term.

[sarahfisher]

That joke at the end…oh man, that was good.

[aliannarodriguez]

So many videos like this one say “see link in the description” but there is no YouTube “description” button that I see. Can somebody tell me where I should be looking? I’m viewing these videos on a tablet.

[martinsmith]

Incredible video! Very interesting info!

[loveandparty]

Well yeah I read all the time about how rich people use debt to become rich. Getting into debt isn't always a bad thing as long as you know what you're doing. I'm pretty sure the rich raise capital with loans instead of getting a job and earning capital over time. The former requires years less of time, which is why rich people earn money more quickly.

[dosmastrify]

Need to master cards for click thru.
Card for meme stocks at the appropriate time stamp. I'll go watch it again lol