Personal Finance for Lawyers

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A lot of people think that lawyers make a lot of money. People automatically think highly of you: “Oh, you’re a lawyer, you must be rich or at least you’re getting there.” However, there is nothing farther from the truth. Of course, there are those blessed few who have made it to the big leagues and are now founding or senior partners of large and prestigious law firms. Surely, without possessing other sets of skills, in-depth knowledge of the law alone will not and cannot guarantee financial freedom and prosperity.

Lawyers usually earn in one of three ways: a) as a purely compensation income earner, i.e. as an employee; b) as a fee-based self-employed professional; or c) a combination of the first two. The problem is, especially for self-employed lawyers, as well as other similarly situated professionals, our income is wholly dependent on how much man-hours we put into working. In other words, no work, no pay! Those who use the time-billing method know this particularly well. As such, most lawyers end up working all their lives because no matter how old we get, for as long as we’re alive, our cost of living just keeps on going up to no end! Sometimes, we even proudly use it as a battle cry, “Lawyers never retire!” Verily, the stereotypical image of the “Abogado de campanilla” comes to mind: An old thin man with unkempt gray or balding hair wearing a faded barong carrying his briefcase to court. Indeed, it is such a sad and sorry sight to behold. I know because I’ve seen them. And could you imagine what would happen to them if they become too old to work or permanently incapacitated?

Generally, lawyers, except for those who are at the same time finance professionals such as CPAs, CFAs, RFPs, RFCs, CFCs, CWMs, etc., abhor numbers. To be sure, one of the significant reasons why people take up law, among other things, is because they did poorly in math and science during their elementary and high school days. Wait, I might just be describing myself here! Nevertheless, studying law and passing the dreaded bar exams do not require one to be adept in numbers. There are no complicated formulas or computations save for the determination of an employee’s minimum wage, a stockholder’s shares of stocks, or the occasional computation of taxable income; although the last one is pretty much done by accountants. The point is, lawyers, nay; most people in fact, just tune out when numbers are involved. As behaviorist Daniel Kahneman said in his landmark book, Thinking, Fast and Slow, our brains usually take the shortcut or the easier route when we are faced with numerical problems, which he refers to as the “System One” mode of thinking.

No wonder, it is because of this numerical aversion that lawyers avoid thinking about personal finance. To make things worse, society’s high regard for lawyers along with the dignity of the profession leave lawyers with no other choice but to do their very best to project success and honorability in how they dress, walk and talk. These kinds of expectations, not to mention the challenges of life itself, put a strain on a lawyer’s finances, especially if that lawyer already has a family of his own.

Having said this, learning about personal financial planning is indispensable for a person who wants to achieve financial freedom and prosperity, regardless of occupation. But the big question in most people’s minds is, “Where do I begin?” And a very good question it is indeed because personal financial planning is a process. Being a process, you should not jump from one step to another without completing the previous step. At Personal Finance Advisers Philippines (PFA), we have what registered financial planner and seasoned investment adviser Efren Cruz, calls the CD-RW approach to personal finance. CD-RW stands for the phases of or major steps in the financial planning process, which are: Cash, Debt, Risk and Wealth. Not undertaking any one of the four areas of financial management will lead to instability in one’s personal finance. Other registered financial planners divide the steps into five or twelve as do Randell Tiongson and Alvin Tabaňag, respectively. For simplicity and ease, however, we shall summarize the process to the four steps. A person hoping to get out of debt should not be investing before he reduces his debts to manageable levels. In fact, he shouldn’t be investing at all if he hasn’t yet protected his downside risks through insurance. Let me briefly discuss each phase:

Cash” pertains to improving one’s cashflow. There are many ways to do this such as getting a promotion, getting more clients, starting a business, or selling some stuff that you do not need anymore. In fact, Robert Kiyosaki refers to this as Financial Intelligence No. 1. Short-term and current savings also fall under this phase. In fact, these two steps under this phase may and should be done simultaneously if you can. In fact, being successful in this area alone would definitely have a strong and lasting impact in your financial well-being.

Debt” pertains to getting out of debt. Albeit, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.

Risk” pertains to protecting yourself and your family from life’s unexpected risks such as loss of job, total and permanent disability, and even death. The steps comprising this phase are setting up one’s emergency fund and insurance planning—both life and non-life. Although not usually done, I would also include here adequate asset protection planning.

Wealth” pertains to the accumulation thereof through long-term saving and investing. In other words, it is how to make your money work for you and not just you working for money. This is the phase where if successful, can spell the difference between being rich, just right, or poor. The primary reason we should be investing is because we will not always have the ability to generate income. Investing can be in the form of real estate, business, commodities, or the most popular class, paper assets such as stocks, bonds, money market instruments and pooled funds. Of course, we cannot bring our wealth with us when we pass on from this life, hence, included in this phase is estate planning or how to legally pass on your property and money to your loved ones when that time comes.

For now, we will focus on the first phase, which is the foundation of the financial planning process, and that is cashflow management. Contrary to popular belief, cashflow management is not only about being frugal when it comes to one’s expenses but about being wise. In behavioral economics, it is said that finance is only 10% skill and 90% behavior. This means that while we may possess all the necessary technical skills, all of that will be for naught if we cannot control ourselves and exercise prudence when it comes to spending our hard-earned money.

For effective cashflow management, categorize your expenses into “needs” and “wants,” the latter also being referred to as “discretionary expenses.” One of the biggest mistakes people make is rushing into financial decisions without considering what’s really important for them. As many people get caught up in the responsibilities of their daily lives, they often do not have time for reflection. The easiest way to identify wants is to actually start with needs. Needs can be further broken down into two broad categories: absolute or bare necessities and near necessities. Absolute necessities are those that are important for our basic survival, things like food, shelter and clothing. On the other hand, near necessities include things like reliable transportation, insurance coverage, utilities, telecommunications, and personal care expenses. While these last items are not necessary for survival, they are fairly important for us to function as responsible and effective members of society. Now that we know what needs are, it would be easy to define our wants. Now, everything else that do not fall into the category of needs are therefore classified as wants and could be cut out if necessary. To be more specific, wants are items that are only nice to have. They are not things that you need to survive. Although sometimes, needs turn into wants when you take your needs beyond the basics, i.e. if you buy a home that is much larger or a car that costs more than you can afford. Carefully go through your expenses and determine which are truly needs, and which are actually wants the order them. After determining your needs and wants, create a plan for living within your means. This is important to finding success in your personal finance.

To reach a certain place, the first thing you must know is where you are right now. You simply cannot plot your course without knowing your starting point. In order to know where you are financially, you have to determine your net worth. Your net worth is an important barometer of your financial health. It indicates your capacity to accomplish major financial goals to be discussed later. Just as all government officials are mandated to submit their Statement of Assets, Liabilities and Net Worth (SALN), everyone would do well to follow suit as this is an excellent tool for financial planning. To compute your net worth, you just have to follow this simple formula: Assets – Liabilities = Net Worth. Your assets consist of everything you own, both real and personal properties including cash in bank and cash on hand; while your liabilities consist of everything you owe such as debts and taxes. For financial planning purposes however, it is generally recommended that you exclude your family home when figuring out your financial assets. Include your home only if you expect to someday sell it or otherwise have it leased out to generate passive income.

Once you have determined where you are, the next preparatory step is to know where you want to go. In short, determine your goals. Your goals will vary depending on the life stage you are in; whether you are a student, single professional, married, married with children, empty nester, or retired. Accordingly, your financial goals may be one or more of the following: income continuation, starting a business, children’s education fund, health fund, buying a house or a car, getting married, a family vacation, retirement fund or estate creation and preservation. It is important to determine your goals as each of these goals will have a corresponding cost that you will need to prepare for. Not knowing where you are or where you are going will only lead you nowhere fast! It would just be like driving around aimlessly with no purpose in mind except to waste precious fuel. Failure to plan is a plan to fail.

Once you have plotted your course, it is now time to gather your resources for the journey, and this is where saving money comes into play. Most people however, if not everyone, try to save only what is left, if any, of their salary or income after paying all the bills and cost of living expenses, sometimes even including their leisure expenses. And this is exactly why they fail. Instead of using the formula Income – Expenses = Savings, we should change our mindset to Income – Savings = Expenses. Better yet, I’ll let you in on the secret formula to prosperity: Income – Tithes – Savings = Expenses. Specifically, the apportionment should be as follows: 100% (Income) – 10% (Tithes) – 20% (Savings) = 70% (Living Expenses). Now why do I include the tithe? It is because I believe that because God is the one who gives us the ability to produce wealth (Deuteronomy 8:18), then giving back the tithe is one of the best ways we can honor Him with our wealth. To be sure, God told the prophet Malachi to instruct His people to “Bring the full tithe into the storehouse, that there may be food in my house. And thereby put me to the test, says the LORD of hosts, if I will not open the flood windows of heaven for you and pour down for you a blessing until there is no more need” (3:10, ESV). In fact, this is the only exception to God’s law against putting Him to the test (Luke 4:12). This principle of saving is referred to a “Paying God and yourself first.” Nonetheless, if saving 20% is really difficult for you right now, you can start small with just 10% and increase it later on when your cashflow improves.

Saving is an essential part of the process because the funds accumulated as a result of which is where you will source the money needed for your emergency fund, paying off your loans, insurance premiums, and investments, in that particular order if not simultaneously. Without improving your cashflow and saving money, any financial planning activity shall be futile for lack of the ability to execute the same. The strategy to saving effectively is quite simple and is no secret at all: “Spend less than you earn,” or to put it in another way, “Live below your means.” It never fails. One can choose to be a saver or a big spender. The big spender follows the incorrect formula for saving. I know, it’s so much easier said than done; but with God’s grace, it is truly possible!

Some people tend to blame their financial shortcomings on not earning more income. Such people believe that if only they earned more, their financial—and personal—problems would melt away. The thing is, as Robert Kiyosaki puts it, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” In short, it is all about increasing our financial I.Q. Remember, you cannot grow what you do not have. Regardless of your income or how you earn your income, you can make your money stretch further if you practice good financial habits and avoid mistakes. Effective and efficient cashflow management is essential to building wealth. In fact, the lower your income, the more important it is that you make the most of your income and savings because you don’t have the luxury of falling back on your next fat paycheck to bail you out. As aptly posited by Alvin Tabaňag, “A healthy amount of savings is the foundation on which you will build your personal wealth. Without any savings it is impossible for you to achieve financial security.”

There is so much more to learn about personal financial planning that this article can cover. Unfortunately, personal finance, for all its importance and practicality, is not generally taught in our schools. Yes, we have economics in high school and college, but the theories taught therein are usually either archaic or inapplicable in real life due to its extreme technicality. So, invest in yourself first. Read books, blogs and attend seminars of reputable finance professionals such as those mentioned above. The journey of a thousand miles begins with a single step. May the grace of our Lord be with you!

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General Tax Audit Procedures and Documentation

Assessment Process

1. When does the audit process begin? The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for audit.

2. What is a Letter of Authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayer’s books of accounts and other accounting records, in order to determine the Taxpayer’s correct internal revenue tax liabilities.

3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal Revenue, while, for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be served to the concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall become null and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is revalidated.

5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through the issuance of a new LA. However, a Letter of Authority can be revalidated—

Only once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or

Twice, in the case of LAs issued by the National Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

6. How much time does a Revenue Officer have to conduct an audit? A Revenue Officer is allowed only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a Progress Report to his Head of Office, and surrender the Letter of Authority for revalidation.

7. How is a particular taxpayer selected for audit? Officers of the Bureau (Revenue District Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of audit/investigation shall prepare a list of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines for the audit program of a particular year. The list of taxpayers shall then be submitted to their respective Assistant Commissioner for pre-approval and to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by the Regional Director and finally approved by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and inspection for the same taxable year? A taxpayer’s books of accounts shall be subjected to examination and inspection only once for a taxable year, except in the following cases:

When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer;

When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts;

When there is a need to verify the Taxpayer’s compliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of Internal Revenue.

When the Taxpayer’s capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit process? In addition to the authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is being audited, the Commissioner may also:

Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC); and

Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC).

10. Within what time period must an assessment be made? An assessment must be made within three (3) years from the last day prescribed by law for the filing of the tax return for the tax that is being subjected to assessment or from the day the return was filed if filed late. However, in cases involving tax fraud, the Bureau has ten (10) years from the date of discovery of such fraud within which to make the assessment.

Any assessments issued after the applicable period are deemed to have prescribed, and can no longer be collected from the Taxpayer, unless the Taxpayer has previously executed a Waiver of Statute of Limitations.

11. What is “Jeopardy Assessment”? A Jeopardy Assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the Taxpayer’s failure to:

Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or

Substantiate all or any of the deductions, exemptions or credits claimed in his return. A jeopardy assessment is illegal.

12. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a communication issued by the Regional Assessment Division, or any other concerned BIR Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings.

If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment.

13. Under what instances is PAN no longer required? A Preliminary Assessment Notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer’s deficiency tax liability shall be sufficient:

When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or

When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

When the excise tax due on excisable articles has not been paid; or

When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

14. What is a Notice of Assessment/Formal Letter of Demand?

A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.

15. What is required of a taxpayer who is being audited? A Taxpayer who is being audited is obliged to:

Duly acknowledge his receipt of the appropriate Letter of Authority upon its presentation by the Revenue Officer authorized to conduct the audit by affixing in the Letter of Authority the name of the recipient and the date of receipt.

Present within a reasonable period of time, his books of accounts and other related accounting records that may be required by the Revenue Officer; and

Submit the necessary schedules as may be requested by the Revenue Officer within a reasonable amount of time from his (Taxpayer’s) receipt of the Letter of Authority.

16. What is the recourse of a Taxpayer who cannot submit the documents being required of him within the prescribed period of time? If a Taxpayer, believing that he cannot present his books of accounts and/or other accounting records, intends to request for more time to present these documents in order to avoid the issuance of a Jeopardy Assessment, the Taxpayer may execute what is referred to as a Waiver of the Statute of Limitations.

17. What is a Waiver of the Statute of Limitations? The Waiver of the Statute of Limitations is a signed statement whereby the Taxpayer conveys his agreement to extend the period within which the Bureau may validly issue an assessment for deficiency taxes. If a Taxpayer opts to execute a Waiver of the Statute of Limitations, he shall likewise be, in effect, waiving his right to invoke the defense of prescription for assessments issued after the reglementary period.

No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by a duly authorized Bureau official.

18. If a Taxpayer does not agree with the assessment made following an audit, can he protest this Assessment?Yes, he can. A Taxpayer has the right to contest an assessment, and may do so by filing a letter of protest stating in detail his reasons for contesting the assessment.

19. What are the characteristics of a valid protest? A protest is considered valid if it satisfies the following conditions:

It is made in writing, and addressed to the Commissioner of Internal Revenue;

It contains the information, and complies with the conditions required by Sec. 6 of Revenue Regulations No. 12-85; to wit:

a.) Name of the taxpayer and address for the immediate past three (3) taxable year.

b.) Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence he intends to present if it is a request for investigation.

c.) The taxable periods covered.

d.) Assessment number.

e.) Date of receipt of assessment notice or letter of demand.

f.) Itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first.

g.) The itemized schedule of the adjustments with which the taxpayer does not agree.

h.) A statement of facts and/or law in support of the protest.

The taxpayer shall state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted, the taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable.

It is filed within thirty (30) days from the Taxpayer’s receipt of the Notice of Assessment and formal Letter of Demand.

20. In the event the Commissioner’s duly authorized representative denies a Taxpayer’s protest, what alternative course of action is open to the Taxpayer? If a protest filed by a Taxpayer be denied by the Commissioner’s duly authorized representative, the Taxpayer may request the Commissioner for a reconsideration of such denial and that his tax case be referred to the Bureau’s Appellate Division. The Appellate Division serves as a “Court”, where both parties, i.e. the Revenue Officer on one hand, and the Taxpayer on the other, can present testimony and evidence before a Hearing Officer, to support their respective claims.

21. What recourse is open to a Taxpayer if his request for reconsideration is denied or his protest is not acted?

Should the Taxpayer’s request for reconsideration be denied or his protest is not acted upon within 180 days from submission of documents by the Commissioner, the Taxpayer has the right to appeal with the Court of Tax Appeals (CTA).

Any appeal must be done within thirty (30) days from the date of the Taxpayer’s receipt of the Commissioner’s decision denying the request for reconsideration or from the lapse of the 180 day period counted from the submission of the documents. (Sec. 228 of the Tax Code, as amended).

22. If the Taxpayer is not satisfied with the CTA’s decision, can he appeal the decision to a higher Court? Yes, he can. Decisions of the Court of Tax Appeals may be appealed with the Court of Appeals within fifteen (15) days from the Taxpayer’s receipt of the CTA’s decision. In the event that the Taxpayer is likewise unsatisfied with the decision of the Court of Appeals, he may appeal this decision with the Supreme Court.

23. Can a Taxpayer claim a refund or tax credit for erroneously or illegally collected taxes? Yes, he can. The Taxpayer may file such a claim with the Commissioner of Internal Revenue (Sec.229, NIRC), within two (2) years from the payment of the tax or penalty sought to be refunded. Failure of the Taxpayer to file such a claim within this prescribed period shall result in the forfeiture of his right to the refund or tax credit.

24. If a Taxpayer has filed a claim for refund and the Bureau has yet to render a decision on this claim, can the Taxpayer elevate his claim to the CTA?

25. What means are available to the Bureau to compel a Taxpayer to produce his books of accounts and other records? A Taxpayer shall be requested, in writing, not more than two (2) times, to produce his books of accounts and other pertinent accounting records, for inspection. If, after the Taxpayer’s receipt of the second written request, he still fails to comply with the requirements of the notice, the Bureau shall then issue him a Subpoena Duces Tecum.

26. What course of action shall the Bureau take if the Taxpayer fails to comply with the Subpoena Duces Tecum?

If, after the Taxpayer fails, refuses, or neglects to comply with the requirements of the Subpoena Duces Tecum, the Bureau may:

File a criminal case against the Taxpayer for violation of Section 5 as it relates to Sections 14 and 266, of the NIRC, as amended; and/or

Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f), Rule 71 of the Revised Rules of Court.

27. What alternatives are open to Government for the collection of delinquent accounts?

Once an assessment becomes final and demandable, the Government may employ any, or all, of the following remedies for the collection of delinquent accounts:

Distraint of personal property;

Levy of real property belonging to the Taxpayer;

Civil Action; and

Criminal Action.

28. What is “Distraint of Personal Property”? Distraint of personal property involves the seizure by the Government of personal property – tangible or intangible – to enforce the payment of taxes, followed by the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily.

29. What is “Levy of Real Property”? Levy of real property refers to the same act of seizure, but in this case of real property, and interest in or rights to such property in order to enforce the payment of taxes. As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy.

30. In what time period must collection be made? Any internal revenue tax, which has been assessed within the period prescribed shall be collected within three (3) years from date of assessment. However, tax fraud cases may be collected by distraint or levy or by a court proceeding within five (5) years from assessment of the tax or from the last waiver.

 

Robert Kiyosaki: From Rich Dad to Bankrupt Dad?

I first heard about Robert Kiyosaki was when I was in high school. My older brother was raving about it during one of our Sunday family gatherings. He was so amazed with the unorthodox ideas that Mr. Kiyosaki shared in his first book, Rich Dad, Poor Dad. However, being young and carefree back then, it wasn’t until after several years when I was already in law school that I began reading his books. Indeed, in communicating his point of view on why ‘old’ advice – get a job, save money, get out of debt, invest for the long term, and diversify – is ‘bad’ (both obsolete and flawed) advice, Robert has earned a reputation for straight talk, irreverence and courage. So revolutionary were his teachings that when I shared them with my dad, he simply shot them down for being a bunch of nonsense. Of course, now that I am a licensed attorney and financial planner, I realized that Mr. Kiyosaki’s teachings actually made a lot of sense.

Nevertheless, in late A.D. 2012, news began to spread all over social media that Rich Dad® Robert Kiyosaki is now a bankrupt dad because in August of that year, his company, Rich Global LLC, just filed for bankruptcy. So does this really mean that one of the world’s most famous, if not the most famous, personal finance gurus, the one who was allegedly mentored by his best friend’s rich dad several decades ago as a child, failed and became poor all of a sudden? Before we get to that, let me first give you an idea on what filing for corporate bankruptcy really means.

Title 11, of the United States Code, a.k.a. the United States Bankruptcy Code, is the main source of bankruptcy law in the United States. Chapter 7 thereof governs the process of liquidation and is the most popular and common form of bankruptcy. When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 trustee. A trustee is appointed almost immediately, with broad powers to examine the business’s financial affairs. The trustee generally liquidates all the assets and distributes the proceeds to the creditors. In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge—instead, the entity is dissolved. Only an individual can receive a discharge. Once all assets of the corporate or partnership debtor have been fully administered, the case is closed.

Here in the Philippines, our laws refer to bankruptcy proceedings as ‘insolvency’ proceedings. In fact, just five years ago, the Financial Rehabilitation and Insolvency Act of 2010 or FRIA was passed. The new law provides for the substantive and procedural requirements for the rehabilitation or liquidation of financially distressed enterprises and individuals. The FRIA defines “insolvent” as the “financial condition of a debtor that is generally unable to pay its or its liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.” Now you may ask, why would a very rich man like Robert Kiyosaki allow the company he built to go bankrupt or insolvent?

It was reported that the founder of Learning Annex, Bill Zanker, sued Rich Global for $24 million. Learning Annex was one of his supporters when he was still starting as a businessman. Actually, Robert Kiyosaki owns many businesses and Rich Global LLC is just one of those corporations. Robert now runs most of his businesses under his other company, Rich Dad Co. In fact, Rich Dad Co. CEO Mike Sullivan informed the New York Post in an interview that Robert Kiyosaki would not be putting any of his personal fortune toward the settlement. Now, that is the beauty of using a corporate entity as a vehicle for one’s business. It provides a layer of protection against asset raiders such as legal plaintiffs. You see, when a company files for bankruptcy or insolvency, its creditors, including its judgment creditors, cannot just simply collect from the company nor seize it assets legally without first complying with the requirements of the law. That is why Robert Kiyosaki is still quite rich even after filing for bankruptcy with an estimated net worth of $80 million. Having his company Rich Global LLC file for bankruptcy was merely a legal strategy in order to protect his personal assets.

Instead of losing his credibility as a personal finance coach and wealth advisor, such a bold move by Robert Kiyosaki just proves that he is indeed financially intelligent. So much so that he is certainly more financially intelligent than most people, especially those who immediately jumped the gun in judgment against him upon reading the news headlines about his company filing for bankruptcy. Although I have my differences with some of his theories, I along with my colleagues in the financial services industry consider his books as indispensable reading in personal finance and entrepreneurship. It is truly undeniable that all of us, in one way or another, were illuminated and inspired by his teachings.

I am so excited about his upcoming event, Robert Kiyosaki Live in Manila: Masters of Wealth, which will be held on November 30, 2015 at the SMX, Mall of Asia. It’s a once in a lifetime opportunity to learn not only from the master himself but also from other world class wealth coaches, economists, businessmen and educators. I believe that to be financially successful, the first asset that we should invest in is ourselves.

Kiyosaki Live