Fifty-three million dollars. For most of us, that kind of money is hard to picture. And it’s even harder to picture that much debt. And yet, Kanye West announced in February that yes, he has $53 million in debt.
Kanye isn’t the only celebrity to end up in debt or filing for bankruptcy. M.C. Hammer, Mike Tyson, Larry King, Kim Basinger and Wayne Newton are among those who have made and then lost millions.
While your debt may not be in the neighborhood of $53 million, the lifestyles of the rich and famous are not so different from ours. While our debt is on a (hopefully) smaller scale, the same mistakes they made are often those leading the rest of us to bankruptcy court.
Too Much Stuff
Of course footwear is an essential part of life. But when NFL star Warren Sapp filed for bankruptcy, he reported that he owned 240 pairs of Nikes along with several other luxurious items. According to bankruptcy documents, Sapp’s average monthly income was $115,881 prior to his retirement. M.C. Hammer once boasted a net worth of $33 million, but blamed his luxurious lifestyle for his $13 million debt; he filed for bankruptcy in 1996.
Lesson: No matter how much money you make, it’s easy to live outside your means. There is and will always be something you want to buy.
You may not have hundreds of pairs of shoes, but might own a collection of something else. More common among us commoners is the urge to keep up with the “Joneses” in our friends and family circles. A double-income family seems to be doing well – big house, cared-for yard, new cars, and yearly vacations. But a peek into the bank accounts and credit card statements shows the real story. They are spending beyond their means and it’s adding up fast. While they might be able to pay it back now, all it takes is a simple unexpected or unplanned event to put them into big trouble.
This often breaks down to needs versus wants. You probably need a car to get to work. That car does not have to be a new Lexus. You need a house. That house does not have to be 4,000 square feet.
While we always want more, ask yourself … is it worth later filing for bankruptcy and having to sell off those items to pay creditors? Former Pittsburgh Steelers Quarterback Charlie Batch lost his two Super Bowl rings in bankruptcy. Though some sources reported that he managed to get them back later, you could save yourself the embarrassment by living within your means.
Bad Business Decisions
Many, many celebrities have walked down this road. You can find endless stories with a similar theme – they earn a lot of money doing something and then begin investing it. Soon, they find themselves broke. Here are just a few examples:
Sinbad has filed for bankruptcy twice, in 2009 and in 2013. He told Oprah his losses came through poor investments.
P.T. Barnum invested in the development of East Bridgeport, Connecticut and went bankrupt when that didn’t work out.
Walt Disney was not always making money. Before he hit it big in Hollywood, he filed bankruptcy in Missouri after his financial backers pulled out of his company, the Laugh-O-Gram Corporation.
George Clinton’s problem was not investing, but failure to protect himself. He is known as one of the most important innovators of funk music, but lost out on an estimated $100 million in royalties because he didn’t disclose his songs as a source of possible future income during his 1984 bankruptcy filing.
You might not have millions to invest, but even your thousands could cost you. Bankruptcy attorneys have many tales of a husband and wife starting a business that fails. Or family members investing in their brother/sister/cousin’s business, which later goes bust.
Lesson: Choose carefully where you put your money. If you can’t afford to lose it, investing might not be a good idea.
During Sapp’s bankruptcy, he reported owing millions in child support payments to four different mothers. Burt Reynolds filed for Chapter 11 in 1996, blaming in part his costly divorce from Loni Anderson. Lorraine Bracco (known for her role on “The Sopranos”) filed for bankruptcy in 1999 after a five-year child custody battle with her ex-husband. The substantial legal fees and taxes put her into debt.
Divorce, child support payments, and alimony are all triggers that can lead to bankruptcy. In some cases, bankruptcy is used as a tool during divorce as a way to dispose of assets and eliminate debt. But if you’re expecting a split from your spouse or child support payments, it’s a good idea to get your finances in order first.
In some cases, the “family” isn’t necessarily your blood. Larry King filed for bankruptcy in 1978, following accusations from his former business partner of grand larceny. Kim Basinger’s discord came after she backed out of a deal to star in the 1993 film “Boxing Helena.” Main Line Pictures sued her for $7 million.
Actor Gary Coleman filed for bankruptcy in 1999, citing long-term medical problems as part of the reason.
Medical care gets expensive quickly. A surprise surgery or heart attack will set you back tens (or hundreds) of thousands of dollars. Depending on your insurance policy, you may be paying medical bills for a long time.
Frequently the problem with medical bills is that it’s unexpected. Even if your savings account can handle the expense, the need for intensive medical care means you are probably not working. How long can your family survive without a paycheck?
Lesson: buy long-term or short-term disability insurance, pay your premiums, and keep money in a savings account for emergencies.
The Real Cause of Bankruptcy
People of all ages, all income levels, and all education levels file for bankruptcy. According to Physicians for a National Health Program, medical reasons contribute to 62 percent of bankruptcies. “Most medical debtors were middle class,” the PNHP reported. “They had owned homes, had attended college, and had held responsible jobs. Seventy-eight percent even had health insurance, mostly private coverage – at least when they first got sick.
Despite this, it’s misleading to say that medical problems cause bankruptcy, just like it’s misleading to blame divorce or overspending for financial woes. The problem may begin with overspending, but then something else happens on top of that: divorce, surgery, poor investment. So you might guess that bankruptcy occurs due to a mix of factors.
But if you look at all these bankruptcy filings, you can boil them down to one single reason – lack of preparation.
In the case of celebrities, perhaps they expected the good times to keep rolling. With lots of money coming in, it’s easy to think it’s just going to keep happening. But what about those of us not pulling in $115,000 per month? We still expect our paychecks (however small or large) to keep coming. Unfortunately, you never know when the car will break down the same week your water heater goes kaput. That might be fine at first – you can squeeze those onto your already crammed credit card – but then what happens if you lose your job?
The harsh truth: the true cause of bankruptcy is poor financial planning. If you plan ahead and save, you can weather almost anything. In other words, take a lesson from Kanye West and make sure to plan for a rainy day.