Long-term unemployment, unbridled spending or the failure of a business can take their toll on clients, sometimes leaving them in serious debt. In times like these, financial advisors may have to help their clients face uncomfortable issues, including debt consolidation or bankruptcy.

Tina Tehranchian, in her 24 years of working as a financial advisor, has had two cases of entrepreneurs who fell so deeply into debt that personal bankruptcy became the only option.

“It’s not just a financial decision,” says Tehranchian, branch manager and senior financial planner with Assante Capital Management Ltd. in Richmond Hill, Ont. “It’s also a moral decision. One of my clients who filed bankruptcy loathed making that decision and put it off for about three or four years despite his accountant’s express recommendation that he file for bankruptcy.”

This client had been successful in his business but faced rapid changes in technology and competition from China. Sales dwindled. Debts climbed. His marriage broke down and he lost his business. The only assets that could not be touched by creditors were his RRSPs. He still has not recovered.

A second client had been the successful driver of a family business but had a gambling issue and ended up going into debt and giving away his company shares. Once he declared bankruptcy, he got a handle on his problem and then got a job. With Tehranchian’s help, this client started to save his earnings and built up his credit rating to start over again.

There are ways, Tehranchian says, to build in precautions to clients’ financial plans right from the start. “For a business owner or entrepreneur,” she says, “there are risks in terms of the loans they take out to expand their business. The assets of the business could always be attacked by creditors or anyone who sues the business owner for any reason. It’s important that the ownership of the assets be set up in a way that gives [the business owner] the least exposure if those situations arise.”

Tehranchian suggests that if an entrepreneur is in a solid marriage, the couple’s house or cottage be held in the spouse’s name rather than in the entrepreneur’s name. But this change must be made far in advance of any problems arising in the business.

Peter Ficek, an advisor with Terra Firma Financial Inc. in Calgary, goes through a three-step process with financially troubled clients, many of whom are referred to him by lawyers and accountants.

Ficek first requests all of the client’s financial information, including tax returns and bank statements, to assess what can be done with assets and liabilities, as well as with budgeting and spending.

If that step alone doesn’t lead to a solution, Ficek might recommend a consumer proposal, which is an offer to pay creditors some of what is owed to them, or ask for the time to pay off the debts to be extended, or both, within five years.

Step 3 is declaring personal bankruptcy. Even after that, Ficek says, you can help your clients by emphasizing the importance of managing their debt and cash flow.

Depending upon the province, record of personal bankruptcy may remain in a client’s credit file for up to seven years. But, Ficek says, it’s possible to shorten that time.

One way to rebuild a credit rating is for the client to take out an RRSP loan that requires minimal underwriting. Four months after that loan has been paid down, request consumer disclosure from Equifax Canada Co., the consumer credit-reporting agency, to ensure the lending institution has made an entry that the loan has been paid down.

“This [process] will help to establish the credit rating much faster,” Ficek says.

He also suggests that clients get a credit card from a department store, make sure the card stays paid off, then slowly upgrade the credit level on the card.

“If you don’t take some of these steps, it will take a lot longer to qualify for any type of credit,” Ficek says. “And we all know that credit is an important part of financial planning.”

A great deal of emotion is involved in serious debt, and people often underestimate their ability to get out of the debt trap, says Avraham Byers, a personal financial coach in Toronto.

“[People deeply in debt] think they’re doomed and were never good with money, so they never will be,” Byers says. “That’s not true. It’s a skill set you learn.”

Still, there are times when you will need to realize you can’t do anything about the crux of your client’s money problem and should recommend a therapist.

Byers says he “messed up” his own credit rating when he was in university, but he eventually paid back all the money he owed.

“There’s a great feeling when you are able to build up your credit [rating] again,” he says. “Credit is totally repairable, even after bankruptcy.”

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