Finding your financial feet after a fall in fortunes

Floods, bushfires, a pandemic, a cost of living crisis and even a mouse plague — there has been a lot to contend with in the past few years which has rocked our financial stability. And that’s before we add in the human elements of relationship and health breakdowns.

But while it may feel like there is no recovering from a bankruptcy, the loss of your home or the closure of your business, the experts want you to know one thing – you can survive a financial setback.

For more stories like this, order the winter 2023 issue of Kanebridge Quarterly here.

Sandra Blake has spent decades counselling Australians who have faced every type of financial strain and setback. And since March 2020 — when the Small Business Debt Helpline was established following the 2019 floods in Queensland and the 2019-20 Black Summer bushfires in NSW — Blake has turned to helping small business owners.

“Many of our (small business) clients have been affected by multiple disasters — mouse plague, bushfires and drought — but also changes in their personal relationships which can lead to health or mental health problems,” Blake says. “Also, changes in the economy, which has meant their consumer clients have less income to spend, has affected them.

“We speak to suicidal people regularly and unfortunately that seems to be happening more frequently.

“But I want people to take away one message: sometimes it may seem like there are no good options available to get you out of your situation, but there is always a pathway out — always.”

The rate of personal insolvencies — a legal agreement you reach with your creditors to pay an agreed amount of your debt over a period of time if you can no longer afford to pay the full debt — increased in January, according to the Australian Financial Security Authority. There were 772 new personal insolvencies in January, up from 612 in December 2022. Of those, 414 were bankruptcies and 344 were debt agreements.

Mortgage stress, which is considered to occur when 30 to 35 per cent of your household income goes towards the mortgage, is also on the increase. With more than 10 interest rate hikes since April 2022, it is estimated more than 1.3 million Australians face mortgage stress, according to financial services company, Octivo.

A survey by comparison site Finder also reported four in five people were stressed about their financial situation in March.

So, what can you do if you find yourself suffering from debt or facing a financial setback? Finder’s money expert Sarah Megginson says you need to first know exactly where you stand financially before you can find a way out.

1) What is the state of play: “Drawing up a budget can help you prioritise your expenses and allocate your resources effectively,” Megginson says.

2) Ask the tough questions: “Can you negotiate your way out of this by offering to make part-payments or establish payment plans,” she asks. “Are you looking at bankruptcy and if so, what does that look like and what impact will it have on your lifestyle?”

Sarah Megginson says making an honest assessment of your financial position is the starting point

But even those two starting points sound a little easier said than done. Blake says you don’t have to do this all yourself. A financial counsellor can offer free and completely anonymous help and they are highly qualified in the area of financial recovery.

“There are lots of ways we can help; we can help you create a payment plan with your creditor or even enter into an informal debt agreement which in most instances comes with a debt reduction,” she says. “For example, you can negotiate with your creditor to pay $12,000 out of the $20,000 debt in a payment plan.”

She says this is where it’s handy to have a financial counsellor who can negotiate on your behalf.

“A utilities or telco company may not accept a debt reduction plan from an individual, but they may accept one from a financial counsellor because enlisting the help of a counsellor shows that person has a genuine commitment to getting out of debt,” she says.

Jane Monica-Jones is a financial therapist who helps people get back on their feet mentally

Jane Monica-Jones is a finance therapist, so she’s a mental health practitioner rather than a financial counsellor, and often works with people who face chronic financial problems. She says the psychological recovery is key.

“A significant hit not only ruptures your financial situation but ruptures your mental health,” the co-founder of the Financial Wellbeing Company says.

“As circumstances change externally, like with your finances, it can wobble your sense of resilience and confidence,” Monica-Jones says.

“I help people fight chronic financial strain, not crisis strain. I try to stabilise them, to help them once they have weathered the immediate crisis, but may find that they’re still not thriving. We build on what is working in their life; I tell them ‘you got on this call today, you got the kids to school – all of that is working.’”

She says it can help to focus on the small picture, not the big one.

“The work I do operates hand in hand with a financial counsellor, we assist different parts of the person’s financial setback.”

Starting afresh

Espen Harbitz’s boutique hotel, restaurant and bar, The Oriana Orange, was open for three years when Covid hit. Like thousands of regional business owners, Harbitz took a financial hit when he had to close his doors for a three-month shut down — not once, but twice.

But the savvy businessman from central NSW, who credits himself with always looking for the positive, took the closure as a chance to re-evaluate his business.

“Having to close the doors gave me the opportunity to re-evaluate my business structure and create a very clear plan for the opportunities ahead of us,” he says. “It gave me the chance to do things that would otherwise have been too difficult to do.

“I had the hotel bathrooms re-tiled and renovated and the outdoor bar space incorporated into the indoor bar area, doubling the space.

“It also gave me the chance to look at how best to celebrate the seasons in Orange and incorporate that into the business, like outdoor fire pits for the garden in winter.”

The downtime risks paid off.

Harbitz was able to expand his business — which includes the 50-room hotel, a bar with two saloons, a 90-seat indoor restaurant and a 200-seat outdoor eatery — and his staff grew from 35 to 50 since Covid.

Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)

The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.

It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.

Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.

Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.

Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.

With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.

Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.

New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.

“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.

He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.

If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.

Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.

Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.

Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.

There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.

Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.

It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.

Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.

Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.

Finding your financial feet after a fall in fortunes

In these uncertain times, knowing how to pick yourself up after a financial setback is crucial

Starting afresh

When will Berkshire Hathaway stop selling Bank of America stock?