It's hard to believe that the second most charted female vocalist, who has sold over 100 million albums worldwide can go bankrupt. But this strange dichotomy, is a reality for Dionne Warwick, who two weeks ago announced that she had filed for Chapter 7 bankruptcy protection. Court documents revealed that the legendary pop singer, best known for hits like "Walk On By," "Say A Little Prayer," and "I'll Never Love This Way Again," owes $7 million in federal IRS taxes and more than $3 million in California franchise taxes. Compare that to Warwicks assets of $25,500 and $1,000 in cash and you begin to understand why bankruptcy may have been her only option. This rags-to-riches-to-rags storyline seems to repeat itself as celebrities struggle to manage their finances and prepare for a time when they are no longer at the top of the charts. The 72-year-old singer joins a long list of entertainers who filed for bankruptcy including Toni Braxton, Tionne 'T-Boz" Watkins (she also filed with her group TLC), La Toya Jackson, Ron Isley, and MC Hammer. All of whom have attributed overspending, and/or bad business practices as the reason for their ultimate filings. But does filing bankruptcy give irresponsible celebrities an easy way out or does it provide a helping hand in their time of need? Before you start exploring bankruptcy as a magic wand to get rid of those big bills that have your wallet strapped to a gurney, there are a few things you should know.
For an individual seeking personal bankruptcy, there are two types of bankruptcy filings: Chapter 13 and Chapter 7. In a Chapter 13 bankruptcy, the debtor proposes a plan to repay most or all of their debt to creditors over a three to five year period. The plan, if approved, acts like a consolidation loan wherein the debtor makes payments to a Chapter 13 trustee who then distributes the payments to creditors. During this time, creditors are forbidden from directly contacting the debtor. Homeowners often file a Chapter 13 to stop foreclosure proceedings and permit repayment of unfulfilled obligations through the bankruptcy plan. However, if a debtor fails to make timely payments, the trustee can dismiss the plan and creditors may resume collection efforts and foreclose on property. On the contrary, Chapter 7 bankruptcy, or liquidation, is an extraordinary remedy permitted only under a narrow set of circumstances because once approved, all of the debtors unsecured debts are discharged and affected creditors are prohibited from collecting on the debt. Nevertheless, this is no handout. The Chapter 7 Trustee will sell and liquidate all of the debtors non-exempt property and assets to maximize the payout to creditors. In the case of Dionne Warwick, the Trustee will likely sell her two fur coats, two sets of diamond earrings, and art valued at $18,000 to the highest bidder. It's important to know that both filings, require the applicant (referred to as the debtor) to take an approved credit counseling course prior to filing. Debtors must also detail every aspect of their finances, from how much money they have in their bank accounts to the value of their living room rug, in order to determine if they qualify for bankruptcy protection. It's also important to know that filing for bankruptcy does not protect you from paying back your student loans. Bankruptcies are not to be entered into lightly and should serve as a measure of last resort. The process is long and tedious, requires government intrusion on your financial affairs, and ruins your credit score for years. if you're experiencing financial struggles, work with your creditors to settle those looming debts before considering filing for bankruptcy. Tell us what you think: Do you think celebrities should be allowed to file for bankruptcy after spending away millions of dollars? After reading this article, is filing for bankruptcy a hand out or a hand up?
Stacy M. Allen Attorney and Counselor at Law Twitter: @SMAllen_Esq