How do Bankruptcies Work?

Did you know that bankruptcy affects a great number of people? One in ten persons is likely to file bankruptcy. In 2017 alone, 767,721 people have filed for bankruptcy in the United States.

Going through a bankruptcy is a painful and the process itself can be quite frustrating and stressful. In this article, we will try to address some of the main concerns you might have regarding bankruptcy and how they work.

Photo by Melinda Gimpel

Types of Insolvency

First things first: A bankruptcy is a procedure that aims at giving financial relief to a person who has reached a state of insolvency. This basically means that the person has reached a point where he or she is unable to pay back the debt that he or she owes. There are two types of insolvencies: cash-flow insolvency and balance sheet insolvency.

  • A cash flow insolvency means that a person is not able to meet debt repayments.
  • A balance sheet insolvency means that the debtor does not have assets to cover his liabilities.

Nonetheless, bankruptcy and insolvency or not synonyms. Bankruptcy is a legal status of a person. Not all insolvent persons are bankrupt. For a person to be bankrupt, a bankruptcy has to be filed with courts.

Declaring Bankruptcy

While a person can declare bankruptcy, often the bankruptcy process is initiated by a creditor. A bankruptcy process will differ between countries and states, but in general, the process is as follows:

  1. A petition is filed and approved within the judicial system.
  2. A trustee (most often a lawyer) is assigned to the estate and control over all assets moved under his control.
  3. The bankruptcy is announced in a public venue and creditors are asked to file claims on the estate.
  4. The trustee is tasked with monetizing the estate and distributing the proceeds to the claimants based on the seniority of their claims.
  5. Once claims have been settled and the estate has been wound down, the debtor is discharged. The timing of the discharge after the wind-down of the estate can differ greatly between countries.

Bankruptcy in the United States

In the United States, there are two main options to choose from when it comes to personal bankruptcy, namely Chapter 7 straight bankruptcy and Chapter 13 repayment plan case.

Chapter 7

The first option – namely chapter 7 – it enables you to have all your outstanding debt discharged, granted that some liquid assets have been utilized in order to repay part of the debt. The only situation in which you can file for this type of bankruptcy is if you can demonstrate that your current income is lower than the average income for a family in your home state.

Chapter 13

In case you don’t qualify for this, then you will have to choose chapter 13. This plan entails paying a specific portion of your debt in a payment plan of three to five years. As a rule of thumb, these payments are made to the courts.

In the position of a business, then you might file Chapter 1 bankruptcy. Through this option, you have the opportunity of restructuring and reorganizing through a court-appointed trustee. More specifically, you will have to follow a given plan to cope with your creditors.

Note that bankruptcy will remain on your file for five years – at the very least. Therefore, make sure you think this through before resorting to it.

Benefits of Going Bankrupt

The positive thing about bankruptcy is that it usually translates into a discharge. This will prevent your creditors from collecting on debts. Nonetheless, note that there are still some exceptions to the rule and some of these are alimony and child support obligations, recent tax liabilities, and so on and so forth.

Another potentially positive aspect associated with bankruptcy is, of course, the automatic stay. This represents a preliminary court decree that prevents creditors from actively trying to collect debts from you during the actual bankruptcy timeframe. This means you will not be contacted via mail or phone in this respect. Essentially, the automatic stay applies until the bankruptcy court decides to issue a discharge.

The Bottom Line

Bankruptcy is usually the last resort of a person in financial difficulties. There are many nuances when it comes to filing for bankruptcy and options to choose from. Therefore, getting legal and accounting counsel is paramount for anybody considering his or her options.

Should I Invest in Gold?

All investments have to be made by taking into account the objectives of the portfolio, the allocation of assets, and the need for the new investment into the overall investment strategy. Hence, before investing in gold it is best to carry out a basic review of the portfolio goals and then make a choice.

The start of 2016 featured dull economic growth and feeble energy prices which caused the share market to open at its worst. This resulted in an increased demand for gold and its price soared. However, as the year progressed, the share market outperformed gold and by the year ending it was 3 percentage points above the yellow metal.

You may go through the below-listed pros and cons of gold before investing in it.

Advantages of investing in Gold

  • It is a great hedge against inflation and currency: Gold and other precious metals are a good source of hedging any risks such as a possible decline in the US Dollar or other major currencies. Price of gold tends to rise with the weakening of a currency. It is argued that high inflation is marked by increased prices of gold, which safeguard purchasing power. However, there are many who debate this argument. Additional information about the relationship between inflation and gold prices is provided below in the article.
  • Portfolio diversification: One of the major aspects of a good portfolio is diversification wherein there is no correlation between different classes of assets in the investments. This means that the different asset classes fluctuate in their own unique way thereby offering some protection during times of volatility. Over the past 5 years, the price of gold has differed from the different share indices and the movement of each is independent of one another. Thus, gold and other precious metals are a great way to diversify the portfolio.
  • Hedge against economic collapse: Gold and other precious metals can be a great source of barter when the world economy is in turmoil. Over the course of history, it has been observed that people purchase gold as a hedge against uncertain times. When the world appears to be in a state of disarray, investors like to buy and own gold. For example, in 2008, during one of the worst global financial crises in recent times, there was an appreciation of gold by 5 per cent while stocks tanked by nearly 40 per cent. Gold gained over 7 points against stocks in 2011 when it seemed that the United States may default and the credit rating of the country dropped.

Disadvantages of investing in Gold

  • The returns in the long-term are low: As compared to shares, the returns offered by gold have historically been low. It thus makes a bad investment selection for the long term.
  • No revenue in form of dividends: Investment in gold does not offer interest, dividends, or any other type of income. Hence, one of the most renowned investors in the world, Warren Buffet, is against investment in gold or other precious metals. Currently, the interest rate is low, and hence in such a scenario lack of income will play a smaller role as the opportunity cost with regards to investment in gold will be lower.
  • The worth of gold is determined by what a buyer is willing to pay for it: Gold does not have an intrinsic value. Thus, it’s worth can drop if people decrease their investments in gold. Also, it would not be of great value in a barter market as people may consider something like toilet paper or other true consumables to be worth more than gold which does not really take care of any human needs on its own.

The relationship between gold and inflation

It is said that gold does not offer any yield. The definition, however, states that increased interest rates will offer some yield to gold investors. On the other hand, if the FED detects inflation and increases the interest rates, then people will sell gold and purchase Treasury notes for better returns. This will cause the price of gold to drop.

President Trump has stated that he will begin a public works program amount to $1 trillion. Such fiscal stimulus may cause the inflation to rise sharply and making the FED increase the interest rates. This may eventually result in a drop in gold prices.

The above example has to be read in context with what happens in reality and not in theory. It is important to note that the FED does not increase interest rates haphazardly. It wants the inflation to be under control, but its main aim is to keep negative real rates wherein inflation is higher as compared to nominal rates. Raising the interest rate will not offer any positive effect unless there is a faster rise in inflation. This is the scenario where its job of wealth preservation is done by gold.

In the late 1970s, the United States was on the brink of hyperinflation, the gold price was about $130, and Treasury notes dived under 7 per cent. By 1980, gold reached its peak price of over $800, while the ten-year Treasury returns were over 10 per cent. To avoid a worldwide run on the dollar, the FED chief took anti-inflation steps in October 1979. The price of gold kept rising till it reached its peak, but the stranglehold kept on by the FED eventually yielded results and gold prices started to dive.

The current Fed chief, Janet Yellen, may not strangle inflation as in the above example. In the late 70s, the FED had hiked up the interest rates above the inflation rate. However, in 2018, the FED is most likely to increase interest rates but keep it under the rate of inflation.

Different financial issues across the world like persistent unemployment, the European debt crisis, and a hangover of the housing crisis, etc., have created an environment that is fraught with a probable collapse of the global economy. Hence, hedging in gold will offer stability and protect your ability to continue trading for varied goods and services.

 

Is Netflix Worth its Valuation?

Netflix has grown to become a $180 billion dollar Market Cap company. If you add their net debt, that adds up to a total capitalization – aka Enterprise Value – of $192 Billion.  Not bad for a company founded in 1997. Not bad at all.

Price Per Potential Subscriber

If you divide the $192 billion Enterprise Value by the 236 million people that populate the United States of America, you arrive at a value of about $815 per each compatriot of Wilmont Reed Hastings Jr. This is where you might point out that Netflix is a global brand with a global audience. Well, that computation, my friend, would allocate $25 worth of Netflix per human inhabitant of the earth.

NFLX EV/EBITDA Multiple

In the last twelve months, Netflix’s Earnings Before Interest, Tax, Depreciation and Amortization was $2 billion. That means that Netflix is trading at a multiple of 96 times its trailing EBITDA. Disney, by comparison, is trading at a multiple of 11.

So, imagine this scenario: For the next 10 years, Netflix grows its EBITDA by an annual rate of 24.19%. At the end of the tenth year, Netflix’s EBITDA will have reached $17.5 billion. That’s a very healthy growth. But for this to happen, paid subscriptions would have to be close to 1 billion.

Needless to say, a Netflix with 1 billion subscribers does not have the same growth potential as a Netflix with 130 million paid subscribers. What if Netflix was now trading at the same multiple as Disney is trading at today? That would mean that after ten years the enterprise value of Netflix would be $192 billion.

Price is what you pay for. Value is what you get.

 

 

Should I Invest in Bitcoin?

The cryptocurrency market has experienced tremendous growth over the last decade; especially in the case of Bitcoin as opposed to other altcoins; Bitcoin is a digital currency that came into the market early in the year 2009.

What is Bitcoin?

Bitcoin’s operations are purely decentralized with no entity given the responsibility of controlling it. Apart from Bitcoin, there are several other cryptocurrencies available in the market today; the most common ones include Ethereum, Litecoin, Tether, Stellar or BitcoinCash.

Since December 2017, Bitcoin’s value has escalated up to about $1900. However, its value has experienced volatility since then, despite the prediction of digital analysts of financial showing the value will increase to $50000 by 2025. This looks quite confusing whether to or not to invest in Bitcoin? Before making a judgment let’s check over some fundamental aspects of in relation Bitcoin investment;

Is Bitcoin Safe?

There has been a hot debate over the years whether Bitcoin is a safe investment. Regardless of the negative stories on bitcoins that people hear, Bitcoin has proven to be more secure compared to other financial systems.

Firstly, the Bitcoin’s operations are decentralized such that over ten thousand nodes are responsible for keeping track of Bitcoin ledger and validate all the transactions in the network to ensure the security of investor’s money. On the other hand, the centralized system can be easily compromised by hackers or third party. Also, Bitcoin uses proof of work to enhance security and prevent any possible failures in the system.

Moreover, the transparent transaction done using bitcoin is also an indication of its safety. Additionally, a customer does not need to provide confidential information when using the Bitcoin Wallet and thus are not a risk of revealing their identity to possible malicious people.

Is Bitcoin Legal?

The question of the legality of any currency is understandable. Unlike the traditional currencies controlled by a single entity, in most cases the central bank, Bitcoin is unique. The Bitcoin is decentralized and primarily under nobody’s control. Generally, the legality of the Bitcoin currency entirely depends on what are you doing with it, where are you in the world. Nevertheless, is essential to be always updated on the recent regulations that may arise with regards to digital currency.

An Investment or a Currency?

Currency can be defined as a unit of account and store of value or a medium of exchange. On the other hand, Bitcoin as per definition can be termed as an asset. In this case, an asset can be used to serve various purposes. A currency should be trustworthy, convenient and stable. Bitcoin has experienced volatility and fluctuation in value over a long period. Its instability, therefore, cannot qualify it as a currency but rather an asset or a commodity. The value of commodity usually surges. It creates an exchange value that is affected and modified by underlying marketing expectations.

How do I value Bitcoin?

There are several ways of valuing cryptocurrencies. One of the best methods of determining the value is by evaluating the market that the cryptocurrency trades in. In this case, the value of Bitcoin can be determined by assessing the supply and demand in the market. In other words, the price of Bitcoin depends on the interaction between the sellers and buyers. A Bitcoin trader who believes that its rate will increase in future will be willing to purchase it at a more expensive than the existing one.

Wrapping Up

The rising demand for digital currency has got the attention of many people in the financial industry. Some of the advantages of investing in bitcoins include protection fraud, minimized risk of identity theft, direct transfer lower fees of transactions as well as the access to difficult-to-access markets. However, some of the limitations are the uncertainty of its legality, high volatility and high risks of loses. Conclusively, based on the above discussion, investing in Bitcoins might be a risk worth taking, having in mind the demand is growing tremendously, and the number of users is doubling yearly.

Should I Invest in ETFs?

Investing in today’s economy has evolved tremendously over the last decade. With advancements in financial technology and the growth of the Internet in general, the financial markets have become more accessible today than ever before.

Exchange Traded Funds (ETFs)

Growing financial markets entice new product creation and one of the more recent products is an ETF or an Exchange-Traded Fund. Having many of the same characteristics of a mutual fund, this is traded on the exchanges and behaves similarly to a stock with minute by minute price movements.

Difference Between an ETF and a Mutual Fund

As stated, an ETF has similar characteristics to that of a mutual fund in that it mimics an index or underlying asset. However, some of the differences include how it works. With a mutual fund, some funds require a minimum investment amount and only let you enter and exit as described in the prospectus. With an ETF, there are no minimum requirements and you can enter and exit how you see fit.

Secondly, when trading an ETF you are actually trading shares, whereas with a mutual fund you are contributing to the pool of assets and your money is being used to rebalance the portfolio. Some mutual funds will limit when you can enter due to frictional costs.

Lastly, mutual funds are typically priced at the end of the day whereas, with an ETF, the price is changing constantly like a stock.

Are ETFs a Better Investment Than Stocks?

Many individuals ask if an ETF is better then a stock, while it varies on an individual level, here are a few benefits that an ETF will have that equities do not. The first one is that company-specific risk is limited. When you invest in an individual equity, you add company specific risk to your portfolio, but when you add an ETF that tracks a sector or index, you have a limited company-specific risk.

Another benefit to an ETF is it is managed with a fund manager. This ensures that your ETF products are reacting and performing as it should. With a stock, you have to watch the company’s performance yourself and be willing to study and understand what you are investing in at the company level.

It’s difficult to have a flat statement saying one is better than the other because everyone has different investment objectives. Each has their own benefits and it is up to you to understand what your portfolio requires.

Are ETFs Safe?

As a general rule, yes, ETFs are a proven product that appears to be safe and sturdy. However, you cannot take for granted that an ETF is safe, even the popular ones such as the SPY. It is prudent that you as an investor to complete your own research and understand if the ETF is aligned with your financial objectives.

Overall, ETFs are a wonderful way to access certain areas of the market without taking on risks such as company-specific risk. You can find ETFs that track an index or market sector, allowing you to diversify portions of your holdings. ETFs should still be researched and reviewed like any investment and should you still have questions, contact your financial advisor.