I once overheard a guy say Trump was broke because he went bankrupt a few times. The fact that this stranger said this made me realize he had no idea what filing for a Chapter 11 meant. First, it’s really hard to go bankrupt if you have over $2 billion. Also, he didn’t go bankrupt–he filed for bankruptcy. There’s a difference!
Here’s an example:
Say you have a photography business that generates $1 million in revenue. Woohoo! Go you! Congratulations! Now that you know you have a wonderfully successful business, you want to start another one. You go to the bank and take out a $1 million loan.
They say those who don’t need one can get one haha. That’s because they can afford to pay it off with how much money they already make. Spend less than you earn, people!
You take the money and use it to buy $300,000 worth of expenses with paperwork fees, hiring contractors, workers, finding a property, etc. Then you start the busines. For some reason nobody is buying what you’re selling, so you want to stop losing any more money and need to cut off the supply that helps the run the business.
You don’t want to be taxed for any more expenses and wish to protect your assets from further damage. This is why you file for bankruptcy. You still have the $700,000 leftover from the loan safe and untouched. You still have your $1 million dollars in revenue from your other business. Bankruptcy just stops the government from taking any more of your income sourced from this enterprise and officially stops any other costs from flowing too.
It’s a chess move used to protect the rest of your resources and doesn’t actually mean you’re broke. It means you don’t want to be broke. Clever entrepreneurs are rich because they know how to keep their money. Not just because they figured out how to make more money and create more value. 🙂
I really hope this helped those who didn’t study finance. As an advocate for education, I believe these fundamentals should be taught at a young age especially in public schools.