A reader writes: “can you blog about married couples having joint bank accounts, credit cards and investments and what happens if one of them is in trouble financially?”

I may be qualified and contextually challenged to answer this question since I am a lawyer by training (qualified albeit I am not in practice) but do not have any joint accounts given I am single (contextually challenged). Keeping in mind this is not advice but information and not specific to anyone’s situation the response is- it depends (there’s the lawyer talking!).

It depends for a variety of reasons- laws differ depending on the jurisdiction of the joint account but, generally (with double emphasis on generally), here are some scenarios to think about.

1. If there is a joint credit card issued in both spouses name, the “good” spouse is responsible for the entire debt even if the “bad” spouse has declared bankruptcy (in simple terms, a bankruptcy freezes any action a creditor may have against you and a trustee in bankruptcy disposes of the estate (i.e. the bankrupt’s assets) and divides it among creditors for usually cents on a dollar)- I am assuming that the spouses are jointly liable for the debt. Thus, sharing a credit card with a fiscally irresponsible spouse if both spouses are jointly liable for the debt is a very risky proposition for the household (please note there is a difference between joint signing authority and jointly liable- the former allow other people to incur debt, the latter means all the card-holders are responsible for the debt regardless of who authorized the charges- you cannot use “I did not know” as a defense: ignorance of the law is generally not a defense).
2. If you have a joint bank account and one of the account holders is being pursued by creditors (whether in or out of a court action), the creditors will obviously assert that the entire sum in the bank account belongs to the “bad” spouse and it is up to the “good” spouse to prove how much of the bank account belongs to them. Under Canadian bankruptcy law, the monies held by the bad spouse in a joint account will be part of the bankrupt’s estate and used to pay out creditors (if indeed there is any money in the joint account). In a garnishment situation, the same analysis applies. Thus, in one way or another, the spouses have to determine what part of the account was deposited by whom to protect or to pay out from the joint account.
3. The same analysis applies to investments with one twist- insurance products (life insurance, segregated funds etc.) are exempt from seizure from creditors in Canada (assuming monies were not diverted to these instruments for the primary purpose of evading creditors in which case the transaction can be reversed). Thus, the entire pool of investment among spouses is protected if it is in an insurance product. If a joint investment account is not in a creditor-proofed insurance vehicle then the same accounting has to occur as per #2.

The long and the short being: if you are married to a fiscally irresponsible person who may have creditors knocking on your door before too long, make sure you have separate accounts. However, if creditors are already knocking on the door, it may be too late since there are laws to prevent the deliberate transfer of monies to avoid creditors.

As an aside, for those readers who are entrepreneurs, please do think about limiting your household’s exposure to your business risk by avoiding joint accounts and removing yourself from title to the house (a personal guarantee for a business loan will pool the home into the assets the bank can seize upon non-payment).

My usual disclaimer applies to this and all posts: this is information only and not advice and not written with any specific individual or jurisdiction in mind. Please consult an accountant or trustee in bankruptcy if you hold joint accounts of any kind whatsoever with a fiscally irresponsible spouse to ensure the household is protected. Good luck.

Recently, I was faced with a situation where I had the option of obtaining an extended warranty on a big-ticket item. This brought up the larger issue of when anyone needs to buy a warranty on any items. A warranty is, at its essence, an insurance policy on a product that you purchase. In the event something goes wrong, you are supposed to be insured on it. However, as a Consumer Report study found, most warranties are really insurance policies with loop-holes you can drive a truck through (I could not find the entire article).

Having said that, rather than dismiss all warranties outright, here are the worse case scenarios in product warranties:

1. Exclusions are greater than the coverage. Warranties are insurance and insurance should be looked at for what it doesn’t cover more than for what it does. For example, if you commit suicide, your life insurance policy is void. If you participate in extreme sports, you may be voiding the terms of your critical illness or disability insurance. In product warranties, if you drop your laptop computer and it breaks, most warranties will not cover accidents. Most warranties will not cover wear and tear damage either. In essence, a product warranty will not cover you from the things you think it should. Instead, it covers freak occurrences such as your laptop computer battery catching on fire. The other thing to remember is that warranties only cover the direct damage (i.e. we will replace your computer if it catches fire) and not the indirect damage (we cannot pay someone to recover your lost date when your computer caught fire).
2. There is no Cost Benefit. When laptops use to regularly cost over $2500.00, it may have been worthwhile to purchase an extended warranty given how expensive it was to replace one. But when computers sell for under $1500.00 now, what is the cost benefit of purchasing a $250 warranty that has more exclusions to the coverage than the actual coverage? Products that once may have needed warranties because of the high price point have become so affordable that it may be cheaper to replace the product with a more technological advanced model than go through the hassle of applying for warranty protection. Having said that, an extended warranty on a car may be worth it if you drive a lot (but wear and tear is excluded on car warranties). But…
3. Warranty is Issued by a Third Party. Here’s the kicker- someone other than the manufacturer could be offering the warranty protection. This happens a lot in the automotive industry. The dealers set up a separate company that covers the warranty (aka self insuring). If there are too many claims for the separate companies’ comfort, it could always wind itself up and the dealer has no liability and you have no recourse on the warranty. The equivalent in electronics is a warranty issued by the retailer and not the manufacturer.

Do I ever buy warranties above and beyond that built into the purchase price? No. As a friend who once worked at a car company told me, the fattest commissions come from the sale of warranties by salespeople. I also tend not to buy very technologically advanced or overly complicated gadgets. The more complicated things are, the easier they are to break. I try to buy nice reliable things and play the averages it will last a long time. If you are offered a warranty, read the fine-print carefully; if you see all three worse case scenarios described above run for the hills.

Warren Buffet announced that the company he runs, Berkshire Hathaway, is shopping for a big acquisition (anywhere between $30-$60 billion depending on what you read) and there is much speculation on what he is going to buy. The added twist is that Buffet has recently begun to buy outside of the United State market (for example, Berkshire Hathaway owns a part of PetroChina Company Limited). This has lead some to believe that Buffet is going to buy something outside of the United States. Given what we know about the Warren Buffet style of investing, it won’t be trendy, it won’t be tech and it won’t be an up and coming company. Buffet likes to invest in what he knows: insurance, utilities and infrastructure to name a few sectors.

As a purely speculative guess, what would stop Buffet from buying a Canadian company with a large international presence who are market leaders in their industry? What about Manulife Insurance, SNC-Lavalin or Thomson Corporation? It appears that the Canadian government is taking a rather hands-off approach on international companies buying up resource companies so I am not sure that regulatory barriers are as prevalent as they use to be.

Love to hear what you think Buffet will invest in.

The Dividend Guy Blog had a recent entry about whether recent gains in the market are a good or bad thing.

If you have some of the same concerns or that the market dip today will continue, I found this from some research from Thomson Financial: best long terms earnings growth by sectors in the S&P 500 since 1980 (highest returns by % to lowest):

1. Health Care
2. Consumer Staples
3. Financials
4. Industrials
5. Consumer Discretionary
6. Materials
7. Energy
8. Technology
9. Telecom
10. Utilities

The sample size is long enough to give you a good track record of industries that will grow year over year no matter what the state of the economy. Interesting to note that energy is #7 and the recent market gains/losses are being fueled by the energy sector (pun intended).

Fortune Magazine published a survey outlining how households with investable assets of between $1 mil-$10 mil invest their money by asset allocation as of 2006. The results are:

45% domestic equities
15% bonds
13% cash
11% international equities
7% investment real estate
5% private equity
2% other
1% hedge fund
1% commodities

A couple of observations:

1. Pretty boring stuff don’t you think? It reinforces the point there is no “magic bullet” solution to financial freedom.

2. only 7% in investment real estate. very interesting. I have some thoughts on this matter in later posts.

3. 13% cash- the rich understand the concpet of liquidity. Having cash around always gives you the feeling of security.