West Palm Beach Bankruptcy Attorney

The Risk of Leveraged Debt

Some people are confused as to how a multi-million dollar company with many streams of income could file for bankruptcy. A person would reason: “If a company is bringing in so much money, why on earth would it be in financial trouble?”

The answer to this question is based on both perspective and cash flow. Many businesses operate on what is called leveraged debt. Leveraged debt is the use of debt to make money on a particular investment. The most common form of leveraged debt is when someone buys a house.

When buying a house that costs $100,000, an individual has a number of different ways to pay for it. If he has the money sitting in a bank account somewhere, he can simply take the required funds and hand it over to the seller. He may also take out a loan on the house, with a promise to pay agreement. He may also put a certain percentage down on the property and borrow the rest.

In a short while, the individual will have an opportunity to sell the product. If the value of the house appreciates over time, to say $110,000, he will have made money on the deal. His overall profit margin depends on how much of his own money contributed to the purchase. If he purchased the house completely on his own, it would be a 10% gain. If he purchased it having only contributed $20,000, it would be a 50% gain. An individual with $100,000 may divide his money into five different purchases and make $50,000 rather than ten!

The caveat to this money making potential is the risk of default. If you default on your loans, they all become immediately due, which magnifies the amount of outstanding debt you possess in the long run. This may eventually lead to bankruptcy, which is quite serious.

If you would like more information about your financial and legal options regarding bankruptcy and delinquency, call the law office of West Palm Beach bankruptcy attorney Eric N. Klein at 561.353.2800.