A banker friend from Portland, Oregon who specializes in working with builders shared with me a sad (and all too familiar-sounding) bankruptcy story…
A young entrepreneur began his career building one or two homes each year. His unique homebulding style attracted the attention of other customers, and soon this builder could hardly keep up with the demand for his custom-built homes. Over the next few years, he ramped up production, and was recognized in the local business press as being one of the Top Ten Fastest Growing Companies in the area. Buoyed by his success, this now thirty-year old businessman took on the task of building three subdivisions, each with 11-17 lots. Unlike the initial homes, these were “spec” homes, meaning there was no customer paying for the work. As each home was built, it became the property of the builder, with the loans were guaranteed by his personal assets until such time as he could find a buyer for that home.
Well, knowing what’s happened with the housing market across the U.S., you can surmise the unhappy ending to this story. The builder faced $3,000-$4,000 a month loan payments on each home, and it didn’t take very long for him to run out of cash. The new owners of these homes are, or soon will be, the lenders. This business “star”, known for large contributions to charitable causes, had to turn to the bankruptcy courts for help.
As a bankruptcy attorney in Indiana who deals in business as well as personal bankruptcy, I’ve seen many different versions of this same story played out, at least on a smaller scale, with clients in our own state. In my earlier bankruptcy blog, “Yes, Your Business Can File Bankruptcy Without You”, I noted that a business can file for bankruptcy (if it’s a corporation or an LLC) without its owner filing bankruptcy. But the fact is that, for most entrepreneurs, business and personal finances are closely intertwined (just as was the case with the builder in our story). And, while the leading causes of personal bankruptcy include job loss, divorce, and catastrophic medical expense, with business owners sometimes the main cause is business reversal. Business owners – all business owners – take on risk. Sometimes that risk doesn’t pay off. Hearing this West Coast story, we can comment on the fact that, had this builder kept on putting up just a few custom homes each year in his local market, he would not have been so dramatically and tragically affected by the market downturn in real estate. Hindsight is 20-20, as they so aptly say.
This is a really sad story, you’ll agree, and yet, in a perverse way, (at least to me as a professional in bankruptcy law), it demonstrates the “natural order” of things. Having business owners willing to take risks is a large part of what keeps our capitalistic system going ’round; having the safety net of the bankruptcy system is what keeps those business owners willing to keep trying. I will be happy (and not surprised) to hear from my banker friend, someday in the not-too-distant future, that this young builder’s once again made the Top Ten list.