Is Your Client Insolvent? 9 Red Flags
As a Licensed Insolvency Trustee (LIT), we are a trusted source of professional advice about debt. But most people don’t start with an LIT when they're looking for advice about their financial situation. Many people who are struggling with debt already have advisors that they trust, such as a lawyer, an accountant, a financial advisor, etc., and they look to them for advice.
However, those people don’t always approach these trusted advisors and say “I’m insolvent and I need to review options for dealing with my debt”. They may not realize they’re insolvent, or they may be embarrassed to admit it. Therefore, it’s important that professionals who are in a position of trust recognize the signs of an insolvent client so that they can take the right steps to help them.
Here are nine of the top red flags that may indicate a client is insolvent or facing financial distress:
- Pattern of Late Payments: Consistently paying your professional invoices late may be a sign that your client has a cash flow problem that isn’t temporary.
- Increasing Debt Load: Leverage can be good, but an increasing debt load that is not specifically related to leveraging an opportunity can be a bad sign. And even justifiable debt can be risky.
- Debt Defaults: If a client has defaulted on loans, missed payments to their lenders, is late on taxes, or breached contracts with creditors, it suggests financial problems.
- Declining Revenue: If a major change has occurred that will impact revenue on a sustained basis (such as job loss or loss of a major client), this may predict future problems even if cashflow hasn’t yet become an issue.
- Downsizing: Selling off assets, laying off employees, or severe budget cut-backs can be a sensible business strategy, or it can be a desperate attempt to generate cash or stop bleeding.
- Legal Actions: Pending or recent legal actions, such as lawsuits, liens, or judgments, can suggest unresolved financial issues.
- Seeking Immediate Cash Injection: Sudden applications for loans, credit, or new equity, especially from multiple sources, could signal a client is struggling to finance their commitments or facing pressure from their existing lenders.
- Dragging Their Feet: If your client is dragging their heels in making a decision or providing you information that would allow you to assist them, they may be avoiding seeing their financial troubles in black and white or confirming amounts they owe but can’t pay.
- Upheaval / Disorganization: Sudden changes such as new management of a business, records that are a mess, personal crises, a sudden change in responsiveness, or moving money around may suggest internal issues that could be linked to financial challenges or be the root cause of financial challenges.
Obviously, these signs do not guarantee that a client is insolvent. There are many other possible explanations. What’s important is that if you see these red flags you ensure that you understand the reason behind them. Sometimes, this means having a deep discussion with your client to find out what’s really going on with their business or their lives. If getting to the root of the issue is difficult, you may need to do some work to build trust with your client.
Once you determine that your client may be facing financial difficulty, you will not only want to review your credit relationship with them, you’ll also want to ensure that you’re giving them the best possible advice to deal with it. This may mean referring them to other professionals better suited to provide that advice. If you suspect insolvency, consider consulting with a lawyer who practices insolvency law and/or a Licensed Insolvency Trustee.
Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals (including business owners) review their financial situation and walk through options for dealing with overwhelming debt. If you think your client could use some advice, please reach out to us.
Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
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Frequently Asked Questions
- Typically, LITs focus on either consumer solutions or corporate solutions.
- Consumer solutions include Consumer Proposals and bankruptcy.
- Corporate solutions include Division I Proposals, bankruptcy, receivership, and plans under the CCAA (Companies Creditors Arrangement Act).
Charla Smith has experience delivering all of these options, so if you would like information on any of them, please contact us to find out more.
Not at all. Bankruptcy is one of the services we provide but it is not the best solution for everybody. In fact, more often than not we recommend a solution other than bankruptcy. A Licensed Insolvency Trustee is simply the best resource for reviewing your options, as we are highly trained, regulated by the government and our professional association, and well-versed in a variety of options. Contact us if you'd like to start a conversation about your options.
We can't comment on CRA's requirements to allow a business loss, but we've heard shareholders say that CRA refused to allow a business loss where there was no bankruptcy or formal shut-down of the company, and it's our understanding that a company cannot formally dissolve while it has debts outstanding, so it may be that you have to wait until the corporation is struck for failure to file annual returns, or take other steps to get CRA to allow the loss for tax purposes.
Getting a formal resolution through bankruptcy can be one of the reasons business owners decide that bankruptcy is worth the cost for their small business. Contact us to discuss this option.
At Charla Smith & Company, we focus on the needs of individuals who are struggling with debt, so you've come to the right place. Check out our solutions page for information on insolvency options, our blog for a discussion of various bits of information surrounding those options, or better yet give us a call at 1-403-899-3890 or send us a message and we will work with you to figure out how the various options for dealing debt might look for you.
When a business owner decides not to file bankruptcy but to instead just shut the business down, there are certain things that need to be done to shut it down cleanly: selling remaining assets, laying off employees, dealing with the landlord, communicating with creditors. It's understandable that this seems overwhelming after everything you've been through. This is where it can make sense to find a way to fund the cost of the bankruptcy or to cooperate with a secured creditor who might be considering appointing a receiver. Absent such a formal engagement, a Licensed Insolvency Trustee can give you referrals to others that might be able to help, such as an auctioneer that can deal with the assets or a lawyer that can help you manage responses to creditors. Contact us if you'd like to explore this option.
Charla Smith & Company offers free consultations to anyone looking for more information about dealing with debt. During a Financial Assessment we take an in-depth look at the debt and all related factors such as employment situation, family circumstances, spending habits and patterns to help us determine the best options to achieving debt relief.
If you are a parent of an adult child who is struggiling with their debt and you aren't sure what is the best way to help them, you can schedule a consultation. A full Financial Assessment may not be possible without the participation of your child, but we can share information generally about options based on the information available ad help you to avoid common pitfalls. Contact Charla Smith & Company if you'd like to book a free consultation.
There's a common misconception that if someone becomes bankrupt, everything they have gets sold to pay creditors and they're left with nothing.
The truth is, people often don't lose their assets in bankruptcy for one or more of the reasons we've discussed in What I Wish People Understood About Bankruptcy: Will I Lose All Of My Assets? :
There are many factors unique to your situation which must be considered to determine what you could keep in a bankruptcy. To be sure, the best way to find out is to contact a Licensed Insolvency Trustee for a free no-committment assessment.
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With our experience and our caring approach, we will help you find the best option for debt relief based on your unique situation - from advice on talking to your creditors to a consumer proposal or bankruptcy, and everything in between. We are here to lift the burden caused by overwhelming debt.
Contact us today at 1-403-899-3890 for a FREE, no-commitment meeting, and let us guide you to regaining your financial footing.
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