How to explain away a bankruptcy in my distant past?
April 24, 2006 5:25 AM   Subscribe

I need help generating an 'explanation' for my bankruptcy 6 and 1/2 years ago that will not make me look financially incapable to a potential investor. Are there any 'good' explanations for filing bankruptcy that I could use in order to not have this fact work against me? I need potential circumstances that would warrant a bankruptcy and sound reasonable to a potential business partner. More inside...

I filed bankruptcy 6 and 1/2 years ago as a financial move to alleviate large accumulated credit card bills that were too much of a burden to handle. It was a LONG time ago, and since I've been very financially capable and have saved over $50,000 while working for the company I've propelled into success. I'm not at all the same person I was when this occurred, but my credit is still marred from that era.

Anyway, I have a complex situation approaching where a 'venture capitalist" friend of mine (who's actually my landlord) may be considering investing in a new company that I would run. Part of the arrangement would include a 'creative' financial deal in order to allow me to purchase the house I'm currently renting from him (the 'venture capital' guy). This would definitely prompt my prior bankruptcy to come to the surface.

Does anyone have any 'good' potentail explanations/excuses for my filing of bankruptcy that would sound better then 'I wasted alot of money, ended up cornered and bankruptcy was the best option'? I need to remain impressive on all levels, and don't want this horrid mark on my credit to hamper my negotiations. I need possible 'reasons' for bankruptcy that sound reasonable and not incriminating. Any suggestions?
posted by AdInfinitum to Work & Money (17 answers total)
You should be honest.
posted by echo0720 at 5:27 AM on April 24, 2006

What'd you waste the money on? If it was booze and hookers, then short of bald-faced lying there's not much you can say. But if you were unemployed for a time and paying living expenses, or had medical bills or some other emergency that significantly contributed to those credit card bills piling up, you could focus on that aspect and maintain some semblance of honesty.
posted by jacquilynne at 5:39 AM on April 24, 2006

I agree with the honesty, but if you have been financially well-behaved for almost seven years (doesn't the bankruptcy come off your credit report then?) then you have strong evidence that you have learned from your mistakes. Many landlords do a credit check on potential tenants, so he might already know about the bankruptcy anyway.
posted by TedW at 5:39 AM on April 24, 2006

As an added note, mentioning you intend to make stuff up to cover up your financial history on a website where your profile is attached to your real name? Your VC-guy/landlord will probably google you at some point in this process.
posted by jacquilynne at 5:40 AM on April 24, 2006

I my experience, admitting to past mistakes is the best thing you can do for your credibility. ISTM that a blown coverup would do you lots more damage than revelation of a six year old bankruptcy.

"Before you put up any money, you need to know that I screwed up my financial life so bad six years ago that I had to file bankruptcy. I'm not going there again - my credit rating is still screwed - but I couldn't let you invest in this company without knowing about it."
posted by flabdablet at 5:40 AM on April 24, 2006

Just tell the truth.
posted by 543DoublePlay at 5:45 AM on April 24, 2006

Response by poster: Just to clarify, I am not intending to 'lie' about the bankruptcy, I'm just scared that the mere mentioning of the topic could throw off my momentum and I want to know how to best explain it (in a few sentences) in order to avoid any initial misconceptions.

Also, my bankruptcy was due to a layoff from a new job that occurred right after a relocation leaving me with high expenses and no resources. The situation was not generated as a result of any frivalous spending or poor financial decisions, it was rather the 'best' financial decision I could make at the time...honestly.

I'm looking for the cleanest way to express the situation from a potential investors point of view. Thanks!
posted by AdInfinitum at 5:58 AM on April 24, 2006

Also, my bankruptcy was due to a layoff from a new job that occurred right after a relocation leaving me with high expenses and no resources. The situation was not generated as a result of any frivalous spending or poor financial decisions...

That sounds pretty good right there.
posted by jacquilynne at 6:08 AM on April 24, 2006

Ah, what you want is SPIN. Ask a republican. :)

Ahem. Sorry. More seriously.... when you're trying to sell investors on you and and your company, you're selling a story. Humans tell stories. It's one of our most fundamental drives. If the bankruptcy is an integral part of the story -- which it is -- then it should be in the narrative.

Something like, "6.5 years ago, I was bankrupt and broke. Starting with nothing, I've built this business into...."

Really and truly, it's a net positive. It shows drive. Treat it that way.
posted by Malor at 6:13 AM on April 24, 2006

Your landlord is the person who probably knows the most about your (current) ability to pay bills on time, so if he wants to invest, I'd suspect this won't be all that big an issue.

When it comes up, don't spend a lot of time trying to explain the past. Just outline what plans you have to prevent it from happening again. Bonus points for talking about what you learned from that experience that will benefit your new business.
posted by winston at 6:21 AM on April 24, 2006

The same as in politics, you want to be in front of the story. You want to be the one to let your investor friend know this and describe the circumstances, and you want to do it sooner than later. If your friend knows about this already from a cold credit report it may even be (in his mind) a sort of informal "test" of your credibility and honesty and thus his willingness to commit to your project.
posted by mikel at 6:37 AM on April 24, 2006

It's plausible to think that it won't affect you a bit, so long as you can demonstrate (on paper) rock-solid stability and good financial choices on your part ever since. He'll be able to tell.

And don't lay a long, dramatic explanation on him. Believe me, these guys have heard it all. Just present your deal to him and he'll surely ask questions about the bankruptcy if *he* feels he needs to. Give honest answers.

Hope you get the deal put together. Good luck!
posted by peewee at 7:04 AM on April 24, 2006

Seriously, your actual story sounds like the best one. "I was laid off after relocating and got into a position where I had to declare bankruptcy" is hardly the story of a financially irresponsible guy - it's the story of a guy who ran into a string of bad luck. The fact that you've managed to recover your life in the 6.5 years since shows that you are responsible enough.
posted by antifuse at 7:08 AM on April 24, 2006

When disclosing the bankruptcy and brief background for it, you should also note that you have put X months of living expenses into an interest-bearing account, in order to protect yourself in any future lean times.
posted by acoutu at 8:30 AM on April 24, 2006

Wait six months.
posted by Merdryn at 1:04 PM on April 24, 2006

Best answer: It seems that the best story is one in which you were placed in dire financial straits through no fault of your own. You were laid off in a city in which you had just moved to (i.e. you had no contacts or support network to help keep you afloat). In response to the debt incurred you did the best thing you could do, declared bankruptcy, and have done remarkably well since then. Thus, reinforcing the point that the bankruptcy really wasn't your fault.

That sounds pretty good to me, and it's the truth. Double bonus.
posted by oddman at 2:53 PM on April 24, 2006

Response by poster: Big thanks to everyone for helping me to this stunningly simple conclusion. I suspect that the stigma attached to bankruptcy got under my skin somewhere along the way, and thus my hesitation in using the truth to my own avantage. Refreshing...

Thanks so much for the insightful replies. Much appreciated.

posted by AdInfinitum at 3:00 PM on April 24, 2006

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