Quora Answer: How Do I Ensure I Never Go Bankrupt after Being Wealthy?

The following is my answer to a Quora question: “How do I ensure I never go bankrupt after being wealthy?” 

To be bankrupt is the state of being insolvent when debts are in excess of revenue, with no hope of actually paying, or a claim to that effect.  Being bankrupt is not the same as being poor.  It is a legal status where the bankrupt is barred from certain activities, has limited access to financial services, and constraints on legal ownership.  In return, they get legal protection from creditors.  Some bankrupts live quite well. 

There are several ways to ensure that you do not become personally bankrupt.  They range from good financial practices, to risk mitigation, to creating legal vehicles to shield yourself in the course of doing business.  The first involves good financial practices.  One of the rules is to limit personal debt, and spend within your means.  It seems like the most obvious thing, but too many people take risks in their personal finance on the assumption of a best case scenario for everything.  Any promised form of income and revenue that is not in your bank account is not yours, and there is some exposure.  This means do not borrow against future personal income, or some anticipated bonus.  The easiest way people fall into this trap is with credit card debt. 

Another part of good financial practice is to treat investment as a science, not a lottery.  This means no playing the market on the basis of rumours and assumptions, staying away from any business that offers gain well in excess of the amount invested, and studying risk exposure.  Risk exposure includes the standing of the businesses you invest in, such as their compliance and practices.  This includes the currency exposure if you invest in other countries.  This means political risk if you have investments and business in places that are less developed. 

The second part of protection is risk mitigation.  This includes practices to limit some of the risk, as mentioned in passing above.  Most of all, however, this is about having insurance.  Well managed insurance coverage ensures that untoward events such as accident, natural disaster, employee misbehaviour, and personal critical illness does not immediately impact the cashflow of the business or its revenue stream without some form of cushion.  A well-managed personal insurance portfolio is the surest protection against personal bankruptcy due to unforeseen events. 

Thirdly, if you are engaged in business or investment , you always run them through distinct legal vehicles, such as companies and trusts.  This means you load the risks and loans on these entities, and not yourself personally.  This ensures that should there be a catastrophic loss, such that debts exceed the value of collateral, it is a matter of declaring the entity bankrupt, while sandboxing your loss.  This is not as easy as it sounds because some forms of credit make directors and trustees personally liable.  You need to have a compliance and legal team to run this through. 

Finally, if you are wealthy enough to need these measures and vehicles, you are also wealthy enough to have financial consultants, accountants, lawyers, tax consultants, and relationship managers.  You should have them, and use them.