HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Don’t. Please don’t.
You cosign a note, you are liable. Period! If the other party can’t pay, the bank comes after the person with the deep pockets, with the money=you.
Think about it. Why are you being asked to co-sign? Because the other person is not a good enough credit risk that the bank will lend money on their signature alone.
The two situations where you could be asked to co-sign are for family or in a business situation. For family; each case must be considered individually (they are your family), but in general; don’t. You are being asked to cosign either because they want to start a business and don’t have enough money, or they have gotten themselves in some kind of trouble. If it is the former, let them do it on their own. If they are destined to succeed, they will. If they were not destined to succeed, by co-signing, you may allow them to get into a predicament that would otherwise have been avoided. Everyone is better off.
If the family member is in trouble, either because of financial mismanagement or legal problems; remind yourself that unless there is an obvious change, you will be wasting your money, and in no time they will be asking for more. Also remember the other family members. If you help one, especially the one who got themselves into a pickle, while the others have kept their nose clean, it will create hard feelings.
I do think you should consider co-signing a note for family if something has happened beyond their control, such as illness or a natural disaster. After all, that’s what family is for. I would also consider co-signing for student loans, but only if they have shown they are worthy of your respect and support.
I really cannot think of a reason to co-sign a note for someone outside the family, especially if it is part of a business deal. What if it is actually a scam? You are just courting disaster.
This is one of those newsletters that talks about a situation that may arise only once in your lifetime. But the potential for disaster is so great that you must be forewarned.
While I’m talking about signing notes, let me discuss if you are part of a partnership and borrow money. Say your multi-specialty general partnership of 20 physicians borrows $2M for an office building.
The wording of the note is critical. If you are “joint and severally liable”; it means that each person is potentially on the hook for the entire amount. And that is exactly what it means; you are on the hook for the entire amount.
The bank wants to take every possible precaution to protect their investment. I have no problem with that; it’s just prudent lending practices. I would do it too. Just don’t let them do it to you. A group of 20 physicians should be a great credit risk. Insist—really, don’t let the bank push you around on this—that each person be liable for no more than, say, 10% of the entire amount. Or even better; make the liability prorated. In this example, it would be an equal share=$100K per doc.
Accelerated payment refers to when the bank can “call in” the note. With written notice, you can be forced to pay off the entire amount, usually within 30 days. This never occurs when things are going well. Instead, it occurs at times of financial stress, such as during the Great Depression, or during the financial meltdown of the Bear Stearns or Lehman Brothers collapse. You might be in great financial shape, but if you can’t come up with the cash, you could be forced into bankruptcy.
Some years ago, our medical partnership re-financed the note on our building. I read the entire document, noted there was a “call” clause, and called the banker. He said “Oh, don’t worry, that almost never happens”. Of course it happens, or it wouldn’t be in there. If they try to blow you off with that line, get a new banker. I insisted the clause be removed and it was.
If you are going into an investment, and the promoter asks that your spouse co-sign: Beware. That is a red flag that the deal may not be legit. The promoter wants every possible name on the contract so they can potentially go after them.
When you sign anything, know what you are getting into. Always know your potential liability. Bad things can and do happen. Honoring and enforcing contracts is one of the basic principles of our capitalistic democracy. Read every word. If you sign a contract you haven’t read and something goes wrong, there is only one person to blame. You should also always have a lawyer read any contract you sign. If they have concerns, please heed their warnings.
Not reading a contract, no matter how long; is not a defense. The court presumes you have read it. Things can get unbelievably messy. It is very tough for a person with a physician-level education to plead ignorance.
RMD
What made me write on this subject was an outstanding article in the Columbia Daily Tribune of 4/30/11 entitled “The Fall of an Empire”. It is worth your time to read. Go to http://www.columbiatribune.com
This is from a subscriber who lives in Texas, just north of the Mexican border.
“In last week’s note, you mentioned having some extra canned goods. In addition to hurricanes, we also watch out for the Gulf Cartel and Zeta Gang violence. The government’s official line is that there is no “spillover” violence into the US. There have been countless murders/drive-by shootings in the Rio Grande Valley. Members of the Gulf Cartel have moved their children into my area to leave the worsening violence across the border. There is A LOT not making the headlines, thus plenty of reasons to be prepared”.
RMD comment: As I said, the chance of significant social unrest in the US is very low, but it is not zero. Have some physical gold and silver and supplies. Think of it as an insurance policy.
The Indian Central Bank predicts inflation in their country will be 9% this year.
RMD comment: As I have noted many times, our official inflation figures are bogus. We have significant inflation. Protect yourself by converting your paper money to real assets, with physical gold and silver in your personal possession at the top of the list.
Residential real estate, single-family homes, is dead. At a minimum, there will be years of dead money. More likely, prices will fall further, followed by years of dead money.
I had already written the above, but note that the headline in this morning’s Wall Street Journal is “Home Market Takes a Tumble: Turnaround More Distant After 3% Drop, Steepest Quarterly Decline Since 2008.
RMD comment: If your time frame is 5 years or less, I suggest you rent.
This is from a Canadian subscriber in response to last week’s newsletter about being a contrarian (Note that in craps, the house entices you to bet wrong by giving the highest payout on the numbers, such as 6-6, with the worst possible odds)
“Once upon a time, and far, far away, if a game was rigged (and many were), the “right” bettors are the ones who were worked. So betting wrong provided a slight mathematical edge, but a significant “real-world” edge”.
MF, Alberta
RMD comment: I hope I learn as much from you as you learn from me. The best part of writing this letter is that I have developed relationships with some really neat, bright people I never would have met otherwise.
High school and college graduations are approaching. For my high school graduation in 1969, my employer, W. Carl Graham, gave me Webster’s Seventh New Collegiate Dictionary. I use it at least once a week and think of Mr. Graham every time (be sure to sign it).
Last weekend it was reported that elite US Special Forces killed Osama Bin Laden.
RMD comment: He was an evil man, whose goal was to kill as many Americans as possible, to destroy our liberal democracy. If he had a nuke, he would have used it.
Bin Laden displayed the hypocrisy of so many revolutionaries. He encouraged others to die for the cause, yet lived in a luxurious villa.
Likewise, it disappoints me there were open celebrations here in the US. To quote a friend, who saw serious action in Viet Nam, “There’s no reason to celebrate the death of another man”. We must show we are better than they are.
I find it interesting that in dealing with terrorists, when it is his responsibility to protect our country, Mr. Obama has adopted many of the policies for which his predecessor was so severely criticized.
In last week’s newsletter, I cautioned that the silver miners had already turned down, silver had been up 13 of the last 14 weeks, and that you might consider taking profits in your paper, but not physical, silver.
Last week was brutal for the precious metals, with silver down more than 25%. I don’t know how deep or long this correction will be, but if you were looking for an entry point, the precious metals are a lot cheaper than they were at this time last week.
This last weekend we were in Cleveland for the wedding of younger son Michael to Beth Craig. Michael is getting his MBA at Case Western Reserve, and Beth will be starting her 4th year Dental School at Case.
I realize this is bragging, but I’m so proud of my family. Son John (Washington U Law School, St. Louis, Order of the Coif), Brother Paul (MD, U of Chicago), brother John (Masters Degree), nephew James Doroghazi (PhD, Cornell), niece Anna Doroghazi Prizio (Master Degree, London School of Economics. Her husband Adam is a Notre Dame Law School Grad).
All of my grandparents came over on the boat from Hungary between 1900 and 1921.
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