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Why Do Some Wealthy People File for Bankruptcy?

Celebrities, professional athletes, real estate moguls, oil entrepreneurs as well as groups of lawyers, doctors and business people earn hundreds of thousands or millions of dollars per year. Even if their celebrity or careers are short-lived, we take it for granted that they should have plenty of assets on hand for an early and very comfortable retirement. This does happen to many wealthy people who carefully planned for their retirement or who made safe investments, but not for many others. If you are considering bankruptcy, consult an experienced Los Angeles bankruptcy attorney before taking any unilateral steps to resolve your financial issues.

Wealthy people file for bankruptcy as often as others do, or when their debts are considerably more than their assets and they can no longer meet their expenses. If creditors are not being paid, then they will sue to garnish wages, levy on bank accounts or seize other assets.

The wealthy often want to make more money and invest their funds in restaurants, real estate, casinos or other businesses, often worth more than what they invested so hefty loans are taken out. In a healthy economy, the investor may do well but when demand for products or services slackens or real estate prices dip, the investor still has to pay off the debt. If income or assets cannot pay off the debt or make the monthly payments, then creditors, like a bank, will sue.

In other cases, wealthy individuals simply live beyond their means or spend recklessly. For athletes, when their considerable income wanes from poor performance or ends because of retirement, the mansions and cars, even if paid off, become albatrosses. Maintaining several homes and paying the property taxes can be considerable. Also, what they paid for a mansion rarely commands a price beyond the purchase price since there are few buyers willing to pay that, especially if the owner is in a desperate situation.

Those with considerable wealth may have several businesses or companies, like Donald Trump, with some making money and others that do not. When their debt becomes too much, Trump and others like him will file for either Chapter 7, a liquidation, or Chapter 11, a reorganization, but only regarding their corporations that are losing money. Their personal assets are protected from creditors for the most part and the corporations will either liquidate in a Chapter 7 or file a Chapter 11 reorganization plan to try and lift these nonprofitable businesses to profitable ones over a number of years, if necessary.

Trump was able to restructure his corporate debt, which gave him the cash to remodel his casinos and keep them competitive while giving stock to bondholders in exchange for forgiving the debt owed them. When the casinos did profit, the bondholders profited as well. Trump’s personal assets were untouched and the bankruptcy had allowed him time to gather new investors and overhaul his aging properties without having to pay back much of the debt owed.

For other debtors with steady incomes, they can continue to take their vacations and enjoy their homes and cars and other assets while a bankruptcy relieves them from having to pay the bank for any bad loans it made. Unfortunately, for those wealthy individuals who no longer have the income they once enjoyed, bankruptcy may cause them to lose homes that are not their residences and to sell off other assets that are not exempt at reduced prices. If they are famous enough or have marketable skills, then the bankruptcy will enable them to have a fresh start.

Bankruptcy was designed mainly with non-wealthy individuals in mind. A Los Angeles bankruptcy lawyer, like one of the attorneys at DCDM, can discuss the benefits of a bankruptcy with you, the various chapters available to you, and if this is the right course of action for you.


Dheeraj K. Singhal
About the Author
I help people keep the things they want and get rid of the things they don't want. I have been a lawyer for over 12 years and there are few things I enjoy more then getting great results for the people that trust me with their legal problems.