What is bankruptcy? Do you get out of your debts?

I’ve noticed celebrities declaring bankruptcy but still having really fancy stuff and huge houses. Do you get cleared of your debts with bankruptcy? How can they afford huge homes? Doesn’t bankruptcy mean you’re absolutely broke?

Gold Asked on April 12, 2020 in Business & Finance.
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Bankruptcy is a tool. Getting out of certain debts is just one of the things it can do.

State and Federal laws dictate that there are certain things that can’t be taken by creditors through a bankruptcy proceeding. These are called exemptions.

When you deal with secured debt (like a house or car) you must also consider any creditors holding that secured claim. They must get their money or the property. Bankruptcy can’t change that.

It’s possible to live in a 2 million dollar house and owe 2 million. In this situation there isn’t any money for a bankruptcy trustee to distribute to creditors. So, it’s left alone.

Another thing wealthy people do is create trusts, estates, and companies. Then, it’s those entities that own things. That way the wealthy person doesn’t personally own anything yet they still have control over many things. Let’s say you work for a company that gives you a company car to drive, a very nice company car. Then you file a bankruptcy. People may wonder why you get to drive such a nice car while you are in bankruptcy. The answer is that you don’t own it so your bankruptcy has nothing to do with the type of company car you drive.

So, how can celebrities declaring bankruptcy still have really fancy stuff and huge houses?

– One possibility is that they owe enough money on it so it isn’t possible for a bankruptcy trustee to sell it, pay off the secured creditor (and all other associated costs), and have money left over to pay creditors.

– Another possibility is that the person filing the bankruptcy doesn’t legally own the fancy stuff and huge house.

As to your last comment: Bankruptcy doesn’t mean you’re absolutely broke. In fact, If you wait until you’re absolutely broke to file a bankruptcy … you waited to long.

Star Answered on April 12, 2020.
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