A number of celebrities have made headlines in recent months for having enormous debts and tax problems or because they’ve filed for bankruptcy protection. Actor Eddie Murphy’s ex-wife, Nicole, reportedly owes millions of dollars, including five IRS tax liens of just under $850,000. Singer Toni Braxton recently went bankrupt for the second time, with debts between $10 million and $50 million. And rapper Xzibit – who is said to owe nearly $1 million to the IRS – also headed into bankruptcy court in December 2010, after two previous attempts to wipe out his debts failed.
But celebrities with huge financial woes aren’t the only ones going broke. More than 1.53 million Americans filed for bankruptcy protection in 2010, a 9% increase over 2009 levels, according to the American Bankruptcy Institute. With credit card debt and unemployment running high, experts predict that consumer bankruptcies will continue to rise in 2011 – following a trend that’s been growing since 2005.
If you or someone you know is contemplating bankruptcy, here are five important questions you must ask before heading into court to seek financial relief:
1. How much will it cost me?
Most people who file bankruptcy use a lawyer, and doing so isn’t cheap. Expect to pay anywhere from $1,500 to as much as $4,000, depending on the complexity of your case, where you live and the experience of the attorney you choose.
2. What type of bankruptcy should I file?
The form of bankruptcy you file plays a role in your costs and the overall process. Chapter 7, also called a “straight bankruptcy” or a “liquidation,” is the most common form of personal bankruptcy. To file Chapter 7, you must meet an income test and a means test imposed by the court. A Chapter 13 bankruptcy is known as a “wage earner’s plan.” You have to have a job and you must show the court that you will be able to repay at least some of your debts over a period of three to five years. Those who want to save their home from foreclosure should file Chapter 13, not Chapter 7.
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The former star quarterbacks’ home became infamous in recent years. The 15-acre compound in Surry County, Virginia, was home to a dog-fighting operation which landed the former number-one overall NFL draft pick in jail. The house went on the market for $1.1 million.
The former star quarterbacks’ home became infamous in recent years. The 15-acre compound in Surry County, Virginia, was home to a dog-fighting operation which landed the former number-one overall NFL draft pick in jail. The house went on the market for $1.1 million.
Celeb Real Estate Disasters
Michael Vick
The former star quarterbacks’ home became infamous in recent years. The 15-acre compound in Surry County, Virginia, was home to a dog-fighting operation which landed the former number-one overall NFL draft pick in jail. The house went on the market for $1.1 million.
Drew Barrymore
In 2001, the “Firestarter” actress was involved in a fire of her own. Barrymore and her husband Tom Green escaped a devastating fire at their $3 million Beverly Hills home thanks to their dog who woke them in the night. The inferno gutted the home, causing $600,000 in damage.
Michael Jackson
Rumors of the King of Pop’s finances going bust had been swirling for years before his untimely death. For example, his famed Neverland Ranch was threatened by foreclosure before he received a last minute reprieve from Colony Capital, a private equity group. Sadly, he eventually lost the house anyway.
Whitney Houston
Critics once said she had one of the clearest voices in music, but diva Whitney Houston hit a sour note in 2006 when she came close to losing her $6 million, 10-acre New Jersey estate. The songstress reportedly owed thousands of dollars in back taxes. Then, in 2007, dozens of Houston’s belongings were auctioned off: bras, bustiers, and other props from her past tours, along with a $400,000 see-through grand piano and her ex-husband Bobby Brown’s Grammy awards.
50 Cent
In May 2008, the home the rapper’s former girlfriend and child occupied was gutted by a suspicious fire. No one was seriously injured. The rapper bought the house for $2.4 million.
Jose Canseco
It is rumored that former MLB star Jose Canseco walked away from his $2.5 million home in Encino, an area of Los Angeles. Multiple divorces may have been the final straw. Canseco stated that it did not make financial sense to keep up the mortgage.
Fantasia
2004 ‘American Idol’ winner Fantasia Barrino’s house was on the auction block in order to repay a loan. The home, valued at $1.1 million, was being used to compensate a company that lent Barrino money to pay taxes. Later foreclosure rumors were denied by the star.
Slash
The Guns ‘n Roses/Velvet Revolver guitarist got suckered into a very bad real estate deal according to a lawsuit he filed last fall. Slash says he was duped into buying a million-dollar house that did not have the amenities that were promised in the deal. Perhaps Slash should actually view the house next time before he buys it.
Alex Rodriguez
Rodriguez put his 4,600-square-foot New York pad on the market for $14 million after his ex-wife charged during their divorce that he had an “affair of the heart” with Madonna.
Andre Rison
The late rap singer Lisa “Left Eye” Lopes of TLC faced arson charges in 1994 for setting a fire that destroyed her boyfriend football player Andre Rison’s house.The $861,000 mansion was in the exclusive Atlanta suburb of Alpharetta.
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3. Which of my debts will be discharged – and which will remain?
Too many people go into bankruptcy thinking that it will automatically “wipe the slate clean” and eliminate all their financial obligations. But that’s not true. If you file for Chapter 7 bankruptcy, you can get your credit card debt, medical bills and various unsecured debts and consumer loans wiped out. However, other serious bills will remain – even after a bankruptcy case. Among the debts that generally can’t be wiped out in bankruptcy are: student loans, child support payments and federal taxes.
4. What happens if I apply for bankruptcy but the judge rejects it?
Sometimes people petition the court for bankruptcy but find that their case gets denied or rejected for some reason by a judge. That’s what happened – not once, but two times – to Xzibit, the rapper and former host of the canceled MTV show ‘Pimp My Ride.’
There are numerous reasons a bankruptcy might be denied. Your paperwork might be incomplete, incorrect or in some way out of compliance with court rules. Also, your bankruptcy petition can be rejected if it’s deemed as abusive or fraudulent – perhaps because you went out ran up a bunch of debts with the intention of getting them wiped out in bankruptcy (that’s defrauding your creditors). Lastly, if you’ve neglected to disclose all assets (whether intentionally or accidentally), the courts might deny your bankruptcy request.
When a rejection happens, you can try to fix the problem by addressing the root cause of the denial. If a denial was issued due to flawed paperwork, and you handled your own bankruptcy paperwork, the best solution is to get a lawyer involved to correct the outstanding issues and make sure your paperwork is letter-perfect. If fraud is alleged, you’ll have some -must-ask-before-filing-chapter-7-or-chapter-13-bankruptcyexplaining to do to the courts (and your creditors). And if your bankruptcy was denied because you’ve omitted assets, go back and re-file a petition with the correct information.
The lesson here is two-fold: only supply honest, complete and accurate information to the court. Also, get everything done right the first time to avoid extra costs, hassles, time delays and a possible rejection of your bankruptcy petition.
5. What will my financial afterlife be like?
If you’re contemplating bankruptcy, it’s only natural that you would be concerned about your financial afterlife. Some people mistakenly think that if they file bankruptcy they will forever be treated like a pariah by banks, employers and various creditors. Fortunately, that’s not the case.
While it’s true that a bankruptcy filing stays on your credit reports for 10 years, where it will be listed as a public record, it’s also true that you can successfully rebound from bankruptcy in about two or three years – as long as you handle your finances responsibly following the bankruptcy. That’s why many people who file for bankruptcy protection are able to get credit cards, mortgages and other loans just two years or so after their bankruptcy. In fact, you can still be in a Chapter 13 bankruptcy, and get a government-insured FHA loan.
Therefore, if your economic circumstances truly call for bankruptcy, don’t needlessly fret over your prospects for landing jobs, re-establishing credit or getting loans in the future.
As I explain in my book, Perfect Credit, bankruptcy should only be initiated as a last-ditch option, when all other alternatives have been exhausted. And when it’s necessary, the decision to file for bankruptcy protection often feels like a personal, emotional or moral decision to an individual. Yet it is important to also view the choice as both a legal and a business decision.
After all, bankruptcy proceedings are administered only via court process and are governed by a slew of laws. Additionally, anyone seriously contemplating bankruptcy would be wise to take into consideration the very real economic ramifications as well as the credit implications of bankruptcy.
The good news is that even your worst credit problems – including bankruptcy – probably won’t haunt you as long as you might have feared.
Lynnette Khalfani-Cox, an award-winning financial news journalist and former Wall Street Journal reporter for CNBC, has been featured in the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Check out her New York Times best seller ‘Zero Debt: The Ultimate Guide to Financial Freedom.’
