Making Financial Statements Work For You

I received my bank’s annual request asking that I redo personal financial statement in order to extend my firm’s line of credit. My first reaction was to treat the request an a bureaucratic annoyance; I already supplied copies of my tax returns and the bank knows that my outstanding loan balance is minimal compared to income and assets. Upon further consideration I realized that this annual personal financial statement can play a very positive role in maintenance and substantiation of an asset protection plan, and I appreciated the opportunity to describe my asset ownership to a friendly creditor.

After obtaining a judgment award, one of the first set of documents a creditor seeks from the debtor are all financial statements submitted by the debtor to any lender in recent years. The creditor uses the debtor’s own financial statements to discover assets and to show how the debtor previously described the value and ownership of his assets. Most people inflate asset values when submitting financial statements to banks, and more important, most people are not careful to accurately describe the nature of their ownership interest.

Creditors demand that debtors explain any discrepancies between assets owned and valued on prior financial statement and the assets otherwise disclosed in depositions in aid of judgment execution. Financial statements to lenders that inflate net worth can themselves undermine otherwise carefully planned asset protection.

Financial statements should be used as a tool in your your asset protection planning. Clients should complete financial statements assuming they will someday be shown to a judgment creditor. Use the financial statement as an opportunity to bolster your asset protection plan. Rather than bragging to banks about your wealth on a financial statement, value your assets conservatively so that asset values are no higher than what reasonably is required to substantiate a loan request.

If you own assets in a limited liability company or partnership make sure your financial statement shows that you own interests in the entities and does not state, incorrectly, that you own the underlying asset itself. Be careful to list only your 50% interest in those accounts owned jointly with your spouse resisting the temptation to claim the entire account as your own asset. All legal entities, ownership structures, and encumbrances which are part of your asset protection plan should be clearly stated on each and every financial statement you ever complete. Be very conservative and be very precise in completing these forms.