What is it about celebrity status and bankruptcy? For some reason, it seems that fortune and fame often come with bankruptcy.
Celebrity and Bankruptcy
Celebrity often comes with a big paycheck. And sometimes that paycheck results in bankruptcy. According to Sports Illustrated, 78% of NFL players file for bankruptcy within two years of retiring from the league.
And it’s not just footballers that file. President Donald Trump has notoriously filed for bankruptcy four times. Heavyweight champion Mike Tyson earned over $400 million during his fighting career and managed to still go bankrupt, listing $23 million in debts. Singer MC Hammer was forced to sell his $30 million house as part of his bankruptcy and Burt Reynolds was forced to auction off some of his personal stuff, including the 1998 Golden Globe award he won for his role in Boogie Nights and a gold watch Sally Field had given him.While he denied he was bankrupt, the actor made $2.5 million from the auction. And most recently 50 Cent has filed for bankruptcy, yet has still flaunted his riches in Instagram pictures of him posing with big stacks of cash.
So how can someone be so rich and be so broke?
Bankrupt versus Broke
When we hear the word “bankruptcy,” we often assume “broke.” The truth it, someone can be bankrupt without being broke. It all depends on the type of bankruptcy someone files.
Depending on your situation, if you’re considering filing for bankruptcy, you’ll need to determine which form of bankruptcy, either Chapter 7 or Chapter 13, you should file. As always, it’s advised that you work with a phoenix chapter 7 bankruptcy lawyer or phoenix chapter 11 bankruptcy lawyer to help you determine if bankruptcy is the next step for you.
Chapter 7 (also known an straight bankruptcy) is the most common form of bankruptcy and is available to consumers and businesses.
Under Chapter 7, assets are sold off so that the proceeds can go to paying debt. All proceeds from the sales of those assets are handed over to a trustee, who then pays down any and all creditors. After all creditors have been paid off they are no longer able to collect funds directly from you and your debts are cancelled, meaning you are no longer responsible for them.
You are not able to discharge the following debts under Chapter 7:
Alimony and child support
Drunk driving judgments, criminal fines, restitution
Debts incurred as the result of fraud or intentional wrongdoing
Back taxes under 3 years old
Recent purchases made for substantial amounts
Contracts involving titles or liens such as land or automobiles
Chapter 13 reorganizes debt so that you are able to pay back debts over the next three to five years. This pay-back plan is called a debt repayment schedule. Based on your income, and how much you owe, you’ll repay 10-100% of the debt you owe.
You are not able to discharge the following debts under Chapter 13:
Alimony and child support
Drunk driving judgments
Reasons to File Chapter 7
Chapter 7 bankruptcy should be chosen if the following apply:
You have no hope and have no future hope of being able to repay any debts
Your debts do not have co-signers on them
You are going to be sued by creditors
You don’t qualify for Chapter 13
Reasons to File Chapter 13
Chapter 13 bankruptcy should be chosen if the following apply:
You have already filed Chapter 7 in the past six years
Your debts have cosigners
You will be able to pay your debts within three to five years
Your income disqualifies you from filing for Chapter 7
You need relief from collection proceedings and you want to pay your creditors back but just need some breathing room to get your finances under control
You want to be able to file a Chapter 7 bankruptcy some time in the future
You are behind on your mortgage
You owe back taxes
You have assets that could be liquidated in Chapter 7
You’re a farmer with debt not related to your farming operations and do not qualify for Chapter 12
Chapter 7 and 13 are options available, but Chapter 11 bankruptcy is the most common type. You may see this referred to as ‘rehabilitation bankruptcy’.
Chapter 11 bankruptcy allows businesses to either reorganize or liquidate assets to repay creditors. Usually Chapter 11 filings lead to reorganizations where the business is allowed to continue operations while paying off creditors.
Individuals are allowed to file Chapter 11, but this is rare and usually reserved for individuals that have a large amount of money, which makes sense why celebrities often file Chapter 11.
The Chapter 11 Bankruptcy Filing Process
The Chapter 11 bankruptcy process begins with the filing of a petition in bankruptcy court. Typically the debtor in these cases are corporations, partnerships, and limited liability companies. It should be noted that individuals are able to file Chapter 11 if they have too much debt or income to be able to qualify to file for Chapters 7 and 13.
While Chapter 11 is usually voluntary, sometimes creditors will file an involuntary Chapter 11 against a defaulting debtor.
Typically a debtor will file Chapter 11 where their primary place of business is located, but debtors are also able to file where they are “domiciled." This just means where the business is incorporated or otherwise organized. The process can take anywhere from a few months to be finished, or can continue up to six months to two years.
Business Operations Typically Continue But Court Handles Major Decisions
While most Chapter 7 cases require that a trustee be appointed, a trustee is usually not appointed in Chapter 11. Rather, a debtor will continue day-to-day business operations as a “debtor in possession” (DIP). A bankruptcy court is able to appoint a trustee if it feels that the debtor has committed fraud, dishonesty, incompetence, or gross mismanagement of the debtor’s affairs.
Though a debtor is able to continue business operations, most major decisions are handed over to a bankruptcy court. Additionally, the bankruptcy court must approve the following:
- any sale of assets, including property or real property. This excludes inventory sold by a retail debtor during ordinary course of business
- either entering or breaking a lease of real or personal property
- mortgages or other secured financing arrangements thatwill allow a debtor to borrow money after the bankruptcy case is filed
- shutting down business operations
- expanding business operations
- entering or modifying contracts and agreements with unions, vendors, licensees or others and,
- retention of and payment of fees and expenses to attorneys and other professionals.
Creditors Support or Oppose
Creditors, shareholders, and any other parties that hold an interest in the company have the option of either supporting or opposing actions requiring bankruptcy court approval. And the bankruptcy court must consider input from creditors, shareholders, and all other parties with an interest when deciding on how to proceed with the bankruptcy.
Unsecured Debt is not associated with a specific piece of property, which means that there is not specific property that serves as collateral for the debt. Unsecured creditors are able to participate in a Chapter 11 case through a committee that is appointed to represent all of the unsecured creditor’s interests.
Chapter 11 Reorganization Plan
A debtor typically has four months after filing Chapter 11 to propose a reorganization plan. These four months are usually considered exclusive, meaning that the debtor has the exclusive right to come up with the plan. This plan can also be extended or shortened.
After that “exclusivity period” expires, the creditors’ committee is able to propose a reorganization plan, although this is rare. Typically if creditors are dissatisfied with the debtor’s proposed plan, it will move to dismiss or convert the case to Chapter 7.
Confirmation of Chapter 11 Plan
Once a plan is approved it is referred to as “confirmation.” For a Chapter 11 plan to be confirmed, the plan must meet a number of requirements, including:
Feasibility. The proposed plan must be likely to succeed. This means that a debtor must be able to prove to the court that it will be able to raise enough revenue to cover its expenses over the plan term. This includes making all payments to creditors.
Good Faith. The plan must be proposed in good faith and not by means forbidden under applicable law.
Best Interests of Creditors. The plan must be in the best interests of its creditors. This means that creditors will receive as much in Chapter 11 as they would have if the debtor had gone through Chapter 7. Sometimes this means that a debtor will be required to pay creditors in full rather than just a fraction of what is owed.
Fair and Equitable. The plan must be deemed “fair and equitable” under the “fair and equitable” test. This means the following must be met:
- Secured creditors (creditors that have a mortgage against real property or a lien against personal property included inventory or equipment) must be paid, over time, at least the value of their collateral.
- The debtor is not able to retain anything on account of their equity interests unless all debts are paid in full. These debts can either be paid immediately following the confirmation of the plan, or over time. If paid over time, interest must be included. The bankruptcy court is able to allow equity holders (creditors) to retain ownership interests in the debtor in exchange for any “new money” that is contributed to pay expenses associated with reorganization of the debt. If this is not enabled by the court, equity holders lose all ownership rights once the reorganization plan is confirmed.
Some of the confirmation requirements apply only if the creditors vote against the proposed reorganization plan.
When Should You Consider Bankruptcy?
It’s hard to know if bankruptcy is the correct option for you. Here are some considerations you’ll want to take:
Have you reached the point of no return?
Do you still have an income?
How much longer can you go without hitting bottom?
So many times people put off the reality of their financial situation and continue operations until the point where they have no other options but to liquidate. Even if you still have an income, bankruptcy might be the best option for you. You’ll want to work with a bankruptcy attorney to determine what options you have available. And while it’s never too late, the sooner you act, the better the outcome might be.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix business bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008