Chingo De Dinero

Our positions/opinions should always be free of conflict, allowing whatever we think is true, not to contradict another truth that we believe in.  Bankruptcy is one of those things that gets me all tied up in knots.  First of all, to let someone walk away from their debts just seems wrong, and can lead to reckless behavior.  On the other hand, we do not need indentured servants, and need to have hope in everyone, if we want a productive society.  As Ayn Rand would say, the goal of Government is to protect our individual rights, so which is more important, our right to be free of financial slavery, or our right to our contractual right, to debt?

Although, I do see both sides, and I think everyone would agree the right answer is somewhere in the middle.  I would still lean more towards tougher restrictions on brankruptcy.  Main reason being the debts were incurred under free will, no one forced the person to sign the contract.  By stepping in an forgiving debts, future contracts for debt will be at higher rates, thus future borrowers are hit.  Also, let me make it clear, I am talking about individuals, not corporations.  The two are very different, and maybe I will talk about corporations later on.

So, what is the main cause of individual bankruptcys?  I really do not know, and if you do, please leave a comment.  My guess would be over consumption.  I make X, spend Y, X>Y, over time, the delta becomes so large, you need to reduce it dramatically.  Over time, if you know you can go bankrupt, you will over consume, because you know the “get out of jail for free card”  is waiting.  Also, the biggest punishment for bankruptcy is bad credit for 10 years or so, but really, what does that mean?  As of now, even with subprime credit is easy to obtain, maybe you pay a little more, but that could still be less than what is written off when you go bankrupt.  Also, you can only go bankrupt every few years, which really means you get your “get out of jail card” every few years.

I keep sociaty from abusing this, and over consuming only to reduce debts once they become too large, rules need to be very tight.  There is a process currently, where your case is reviewed, and situation assessed, so abuse is reduced.  Also, the bankruptcy law passed in 2005 helps keep people from abusing Chapter 7, and forcing them to go to Chapter 13.  Allof this is in the right direction, but I still wonder if anyone would say no, if you had a really good lawyer.

On the plus side, if someone is so worried about the bill collector, or if they will be able to buy food, they are not very productive, and could be more of a benefit to society, if this was removed.  By taking the weight off of their sholders, they can get back on their feet, improve, increase earnings, pay off a portion of the debt, and start adding to society again.  I am sure there are many people who messed up in college and need a second chance.  Second chances are always good, but you still much make a cost, so it will be remembered, and not repeated.  What percent do I think need an honest second chance, I am not too sure.  Also, the current cost which I described above, is pretty good, I have not been through the process, so I really do not know if it teaches a lesson, but it sounds pretty good.

If you fall in the boat mentioned above, I would recommend: Get Bankrupt.  It is a site that I am creating to pull lots of info, and in particular help people in Raleigh, Asheville, Fayetteville, Greenville, Greensboro, Wilmington, and Hickory find info and local Lawyers.  If you have any comments, or suggestions for the site, please let me know…I am aiming for December to have it complete.

I recently was in a discussion with two people, and the great idea of Micro Lending was brought up. I could not resist, but as their opinion on Payday Lending (As an owner of FCFS, I clearly support Payday Lending). They began by telling me how bad Payday Lending was, and how good Micro Lending is, and one should be band, and the other should be expanded. So of course, I asked questions and made them contradict themselves, but still in the end, they were “teaching” me about the difference.

Really, if you break it down, they do the same, offer small loans to those who are unbanked, pre-bankable, or any other term you have to say they do not qualify for a bank loan, for whatever reason. The only difference I can really find is that one is a business and the other is a charity (although they like to talk about how it is good business, but will always back down if you talk profit, and real businesses doing it). So, from this, I ask which is better, and I will answer time and time again, if we want it to last in the future, make it a business. Charities are fashionable, but are quickly dropped, which will leave these poor people not available loans. If you make it a business, I am sure companies will be clawing to give loans, and will even compete on prices to give the loans, imagine people competing to give loans to the people who are turned away by a bank, and that is not good?

In the end, why not have both, your charities and the businesses, if people really think cheap small loans are right, let them donate to the charities, not reason to limit the business and deny these poor people loans.

Finally, I stopped screening the hard way. If you have read some of the other information I have written, I think Enterprise value is not valued as much as it should. You hear PE all of the time, but miss the cash position, either positive or negative.

I used to screen for PE and price to book, then look at individual stocks and pick out those with a ton of cash and little debt. I just noticed today, a great measure, not perfect, but good, Enterprise Value / EBITDA. If you didn’t know EBITDA, is Earnings Before Interest Tax Depreciation and Amortization. My way to interpret this, how many year will it take for the company to buy itself. For example, NCTY or The9. They have an Enterprise Value / EBITDA of roughly 3.588. To break this down, the Market Cap is 630 MUSD, they have 316 MUSD cash, 0 debt and have EBITDA of 88.18 MUSD. This means, if they did a full buyback with their cash, then used their profit to buy back shares, they could purchase the whole company in 3.588 years. Of course, this will not happen, and you need working capital, and to reinvest in the business, but man, this is a great way to tell price. Also, this is a stat Yahoo keeps, so you can run screeners off of it….so much time to be saved. Of course, you have to factor in growth, but that isn’t too hard, just look at the analyst estimates, not totally accurate, but will give a flavor.