Archive for April, 2012

Tax debts and celebrity seem to go together like bread and butter, if a recent report from USA Today detailing the financial troubles of several different entertainers is to be believed.

Celebrities tend to be susceptible to accruing large amounts of tax debt because their income, while often large, is so unpredictable, which can make tax planning very difficult.

And the high rate of tax debts has led many celebrities to file for bankruptcy. Tax debts may be eliminated in bankruptcy, but only in some circumstances, and bankruptcy courts are unwilling to help people whose tax debts are a result of fraud or other criminal activity.

Tax Debts and Bankruptcy for Celebrities

According to a report in USA Today, celebrities have a tradition of gathering staggering amounts of tax debt. Entertainers who have run afoul of the IRS include:

  • Lionel Richie. Earlier this month, the IRS issued a $1.1 million tax lien on the famous singer for taxes he allegedly failed to pay in 2010. Interestingly, Richie has no history of prior financial problems, and he is one of the top-selling musicians of all time. So, this may be a temporary blip for the performer, and he recently said in a statement that his tax problems will be “handled immediately.”
  • Other musicians. Lionel Richie certainly doesn’t have a monopoly on tax trouble among musicians. Sources say that Glen Campbell owes the IRS more than $100,000, Vince Neil owes the government $370,000, and singer Roberta Flack is more than $150,000 in debt to federal tax collectors.
  • Famous athletes. According to sources, boxing hero Floyd Mayweather Jr. owes almost $3 million in unpaid taxes, while Dennis Rodman, the colorful former basketball star, owes a comparatively paltry sum of $371,000 to the tax man.
  • Lindsay Lohan. Of course, no list of celebrities in trouble would be complete without the queen of gossip magazines. The former child star reportedly owes roughly $230,000 in unpaid taxes.

Discharging Tax Debts in Bankruptcy

Some of these celebrities may try to discharge debts to the IRS in bankruptcy court, but their task will not be easy.

Tax debts may be eliminated in bankruptcy, but only if they are not the product of fraud, are income taxes, are more than three years old, and meet a few other requirements established by bankruptcy law.

Of course, bankruptcy may help many people eliminate other forms of debt, such as credit card debt or medical bills, which could free up funds that could then be redistributed towards repaying Uncle Sam.

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Bankruptcy auctions tend to be pretty mundane affairs, but every once in a while, a bankruptcy court has to sell a wildly valuable piece of property in order to help a deeply indebted person discharge his or her debts.

A recent case in Newport, California highlights just how expensive these auctions can be. Recently, a bankruptcy court decided it had to auction off a massive estate that was once valued at $87 million, according to a report from Forbes magazine.

So, if anyone is in the market for an Italian-style villa, there is one to be had at a bargain price. Of course, the discounted cost will likely still be above $50 million.

Creditors Demand Bankruptcy Auction for Huge Estate

According to a report from Forbes, the bankruptcy saga of one California estate appears to be nearing an end:

  • The owner. Sources say that the estate, which is modestly known as the Villa del Lago, was put on sale after its developer, real estate agent John McMonigle, filed for Chapter 7 bankruptcy after amassing more than $50 million in debts. This year, McMonigle sold the estate to a group of developers, who proceeded to invest an extra $10 million into improvements on the property.
  • The estate. Remarkably, the Villa del Lago is the largest plot of private residential real estate in Orange County, which is one of the country’s wealthiest zip codes. The estate is spread across 12.5 acres of gated hillside land and includes a 17-car garage, which is difficult to even imagine, let alone construct. The estate also includes a man-made lake with waterfalls and a horse stable.
  • Placed on the market. Not surprisingly, the extent of this construction project left a lot of creditors with holes in their wallets. In order to recoup their lost costs, creditors looking for millions of dollars in debt asked the bankruptcy court to put the estate up for auction. The court agreed, and the starting auction price is $37 million, which is $50 million less than the price at which the property was initially valued.

Nuts and Bolts of Bankruptcy Auction

Most bankruptcy filers don’t have to worry about an auction of their home, but this is a truly unique example of a filer who accrued a remarkable amount of debt.

In this case, according to sources, the court-mandated sale of the estate is being held by an online auction marketplace based in California.

Interestingly, while the trustee who runs the auction has a mandate to meet creditors’ expectations, the trustee still has the power to accept a sale regardless of the price. So, some bargain-hunters may wish to see how low their offers can go.

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In the wake of the record $1 Trillion student loan debt milestone and the ever-increasing credit card debt in the US, many debtors are looking for answers. In an economic environment that has seen a glimmer of hope as of late with optimistic job growth, there may be some extraneous factors at play when determining future debt.

According to U.S. News, consumers have ramped up their credit card spending by 424 percent from 2010 to 2011, resulting in over $47 billion in new credit card debt. It is true that many Americans have turned to credit cards to supplement spending in tumultuous times, but the numbers may be skewed.

Credit card rewards programs are becoming increasingly popular and credit card companies are offering more incentives to park your debt with them.

However, experts warn that you should proceed with caution.

Credit card companies offer many of those rewards only if you pay the entire balance off before the next statement cycle. This can result in a loss of the rewards, many times the entire reason why consumers apply for the credit cards.

Credit card debt can be written off by the credit card companies themselves, but those actions can be devastating to credit scores. In some cases, credit card debt that has been written off by your credit card companies can stick with you from anywhere between three to fifteen years.

A 2010 study by the Federal Reserve Bank of Boston estimates that the average American with debt has over $15,000 in credit card debt alone. A staggering number considering many Americans carry several credit cards with outstanding balances that have compounding interest, meaning the interest is added to the principle.

Experts stress, knowing the true cost of purchases made with credit cards is extremely important. With interest, many purchases exceed the amount the consumer is willing to pay for that item in the first place. Purchases that cannot be paid off within that statement cycle may end up costing you much more than the final sale price. Without knowledge of the true cost of the ride-on mower or fragrance set, debtors are buying items at a falsified price.

Adding to the quagmire of debt, credit card companies have tactics in place to earn money off of your debt. One way that this is happening is with late penalties and annual fees.

There are even fees on some credit cards if you don’t use the card for a period of time.

With all of the costs involved in racking up credit card debt, consumers still continue to use their cards at an ever-increasing rate. As enticing as airline miles, cash-back incentives, and gift card rewards are, experts say that spending only what you can afford is the best possible solution to the debt crisis we as Americans are facing.

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This week, the Washington Post reported that Warren Sapp, a former star defensive lineman for several NFL teams, filed for Chapter 7 bankruptcy in a south Florida bankruptcy court.

What’s perhaps most notable about this bankruptcy filing is how unsurprising it is, despite the fact that Warren Sapp made millions of dollars during his playing career, and currently holds a lucrative position as a television analyst.

These days, professional athletes file for bankruptcy at a remarkably high rate, which reveals the potential financial perils of making a fortune as a professional athlete.

Facts and Figures: Athletes Filing for Bankruptcy

According to the Washington Post, bankruptcy seems to strike professional athletes at an alarming rate:

  • Recent trends. According to a report from Sports Illustrated, an alarming 78 percent of NFL players and 60 percent of NBA players file for bankruptcy within two years of their retirement. These figures, needless to say, are dramatically higher than the rates of bankruptcy for the general population.
  • Notable bankruptcy filings. These bankruptcy filings are not limited to run-of-the-mill players who only play for a few years and are forced to retire. On the contrary, many star players have sought debt relief in bankruptcy court. These players include notable athletes like Dennis Rodman, Terrell Owens, Allen Iverson, and Lenny Dykstra.
  • The Sapp case. Warren Sapp’s case offers a prime example of an unfortunate athlete’s bankruptcy. Sources say that, in his bankruptcy filing, Sapp admits to having more than $6.5 million in debt. This incredible amount of debt led to his need for bankruptcy, despite the fact that he makes more than $100,000 a month through his work as a television personality.

So, with more than half of all professional athletes who play basketball or football having to file bankruptcy after their playing careers, what explains their struggles with money? There are many possible reasons for this odd phenomenon.

Reasons Why Athletes so Often File for Bankruptcy

Some analysts claim that professional athletes are not able to handle their money because they receive massive sums at cash at relatively young ages.

This certainly contributes to some players’ financial struggles, although professional sports leagues, like the NBA and NFL, have taken concerted efforts in recent years to offer financial planning classes to young stars.

Other observers claim that excessive spending on luxury goods and a lack of common sense contribute to many athletes’ financial woes.

These observations may also be true, and professional athletes in the future would be well-advised to consider the plight of their past peers before making financial decisions after they receive their first massive paycheck.

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Total household debt rose for the first time in almost four years during the last quarter, but total family wealth also improved, according to a report from Reuters that cited data collected by the Federal Reserve.

Sources indicate that rising levels of household debt suggest that American consumers may soon start ramping up their spending on goods and services.

Increased consumption may be promising news for the economy as a whole, but it could spell trouble for individual consumers, many of whom may turn to bankruptcy to help relieve their debts.

Household Debt Starts Climbing Again Statistics related to household debt paint a picture of an economy that is starting to regain some traction, according to a Reuters report:

  • Wealth rises, too. In addition to the fourth quarter rise in household debt, that period also saw household wealth increase by $1.2 trillion, which could also lead to more spending in the near future.
  • Total liabilities. Sources say that total household liabilities were worth 117.5 percent of disposable income in the fourth quarter. This was a slight dip from the prior three-month period.
  • Credit rises. Consumers took out 6.9 percent more credit at the end of last year, although mortgage debt dropped by a fairly significant margin.
  • Total wealth rises. For trivia buffs, total household net worth was measured at $58.455 trillion. Experts attribute the gains in household wealth to a jump in the value of financial assets like stocks and bonds.

The latest news show that American households are starting to recover from the collapse of the housing bubble in 2008, which led to plummeting levels of wealth across the country.

Now that housing prices are on the rise, and the stock market has begun to regain its footing, households across the country are making subtle but steady gains.

If housing prices continue to rise at a modest pace, and the unemployment rate continues its downward trek, wealth levels may soon rally to their pre-recession heights.

Bankruptcy and Debt Relief

Of course, as households begin to recover from the recession, many consumers are still looking for debt relief, especially if they are the victim of aggressive creditor actions like wage garnishment or foreclosure.

Fortunately, by filing for bankruptcy, consumers can receive the benefits of the automatic stay, which often halts collection lawsuits, wage garnishment, or even home foreclosure proceedings.

Contact a local bankruptcy lawyer today to learn more about the potential benefits of the automatic stay.

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By now, most of us have encountered a news story or blog post about the infamous “pink slime” beef by-product.

“Pink slime,” a concoction of unused pieces of cow used as filler in meat, first gained notoriety when an article cited use of the grotesque by-product in McDonald’s restaurants. The onslaught of media coverage and public outcry that followed caused a massive drop in demand from restaurants.

AFA, makers of “pink slime”, have filed for Chapter 11 bankruptcy, according to ABC news. The blame for their financial decline has been cast solely on the media's portrayal of the formerly unheard-of substance.

Bad Press Can Cripple An Industry

Numerous fast food chains, including McDonald's and Taco Bell, have already pulled “pink slime” from their products and supermarkets have stopped carrying meat containing the aptly named ingredient.

Companies such as Beef Products Inc., one of AFA’s main competitors, have also been affected by a massive decrease in sales.

Despite the uproar from critics, it was recently revealed that 7 million pounds of “pink slime” beef product is destined to be used in school lunch programs in the US. AFA’s claim that the media has ruined business for them may or may not be substantiated but what we do know is that “pink slime” was a huge moneymaker.

What we can glean as Americans from this abrupt shift in the meat industry is that no one is exempt from financial downturns.

These industry giants have gone from providing product to the nation’s largest fast food restaurants and supermarkets to not knowing if they’ll be able to stay in business. Even companies like AFA, who according to Reuters, produces more than 500 million pounds of ground beef annually, aren’t exempt.

Business Bankruptcy Can Mirror Individual Bankruptcy

  • It’s no secret that Americans like their “things”. These things that we all hold so near and dear can cause attachment issues. Businesses can be the same way but we all must recognize that, whether you’re a Fortune 500 company or a plumber from Ohio, “things” are expendable.
  • Do your research. It takes time and knowledge to decide what’s best for a large company like AFA and the same goes for individuals mulling bankruptcy. By taking the time to gain accurate information you’ll be better informed to make the right decision when the time comes.

Preparing for Bankruptcy

  • Not unlike AFA’s quick downturn, many people can experience a sharp decline in income and be hit hard financially. As fast as one’s finances can get out of hand, it is important to have some preparation if possible.
  • AFA’s reason for filing will be undoubtedly different from yours (unless you’re some sort of closet “pink slime” producer) but it is important to identify the problem. Carefully go over your financial info in order to see where your trouble lies. This may take some time and careful combing of your financials.
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