Celebrities may be rich, but they go bankrupt more often than the rest of the population. Research from Sports Illustrated said that 78% of NFL players filed for bankruptcy within two years of retirement.
There are many examples of famous figures who have gone bankrupt. Donald Trump, who could very well be the next US president, has filed for bankruptcy four times. Mike Tyson earned over $400 million in his career and still went bankrupt with $23 million in debts.
It's still possible to come out of the other side with your money intact. At the very least, many celebrities still have the star power to build themselves from the ground up.
So how can these bankrupt celebrities suddenly become rich?
The Difference Between Bankrupt and Broke
Bankruptcy and being broke are synonymous with each other, but it's wrong to believe that they are the same thing. You can be bankrupt without being broke because there are many different types of bankruptcy. This section will sum up the different types of bankruptcy.
First of all, Chapter 7 bankruptcy is the bankruptcy most people associate with being broke. This is where you are personally bankrupt and the government can liquidate all your assets in order to pay back your creditors. Everything from your business to your house can be sold. This is where someone is broke.
Most celebrities never file for Chapter 7 bankruptcy, however. Chapter 11 bankruptcy is the most common type. You may see this referred to as 'rehabilitation bankruptcy'.
Rehabilitation bankruptcy is where a trustee is appointed in order to make sure that person recovers. The debts still have to be paid, but rather than selling everything the brand keeps going with the sole purpose of paying debts.
Celebrities tend to file for Chapter 11 because they have a brand that can still generate money.
Another type of bankruptcy celebrities file for is Chapter 13. This is a wage earner's plan and it's where a regular income is used to pay back debts. Many celebrities still have a regular income from concerts, signings, and endorsements. These repayment plans usually last between three and five years.
So is Filing for Bankruptcy Always a Bad Thing?
For many celebrities, this is actually quite a smart thing. In a blog post by Brad Smith, CEO of Rescue Financial, Smith argues that in some cases filing for bankruptcy is a smart option.
It's not difficult to see why because in many cases bankruptcy is like an emergency brake. Particularly in the case of Chapter 13 bankruptcy, it prevents things from getting out of hand. The person has some breathing space in which to think about how they are going to get their financial affairs in order.
So why can celebrities do this?
The key with celebrities is they have a brand people know. It doesn't matter if they are bankrupt or completely broke because they still have the capacity to make money, and creditors know this. It's why ordinary people tend to file for Chapter 7, whereas celebrities have these options open to them.
What about their Credit Records?
Everyone knows that credit records are essential for getting credit. Celebrities still receive the same hit to their credit ratings, but they still have some flexibility because of their established brands. A lot of creditors will take a chance because they know that even in the event of bankruptcy they still have a chance to get their money back.
When is Filing for Bankruptcy a Smart Option?
Once you reach the point of no return it may be worth looking into bankruptcy. It's always best to do it when you still have an income because you still have the option of initiating a repayment plan. This is a far kinder form of bankruptcy that protects your assets.
Too many people attempt to put off the reality of their financial situation. They drive their businesses and incomes into the ground until they have no choice but to liquidate all their assets.
Celebrities are extremely privileged when it comes to bankruptcy. Many of them never go broke because of the strength of their brands. They are worth more to creditors out of bankruptcy than they are in bankruptcy, and so they have access to deals that an ordinary person would never have.
It may be unfair, but the same principle can be applied to anyone. If you have the ability to earn an income, and you can prove it, you can avoid the dreaded Chapter 7 bankruptcy.
What are your experiences with bankruptcy and what are your top tips for avoiding it?