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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Written by Craig D. Robins, Esq.Using a hypothetical, let’s explore how the new bankruptcy laws would apply to a celebrity with income-producing ability who loses their job
Miss California, Carrie Prejean, just heard the words this afternoon that many middle-class Americans are hearing all too much these days: “You’re Fired!”
She got the pink slip from her Miss America Pageant boss, Donald Trump, who had practiced saying these most-feared words, “You’re Fired,” weekly on his The Apprentice TV show.
Now that she’s without a job, let’s do the hypothetical: If she had to file for bankruptcy relief because of overwhelming debt, what kind of bankruptcy would she file? What bankruptcy chapter would it be? Chapter 7? Chapter 11? Chapter 13? Would she face any issues?
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Unlike most consumers, celebrities often have great future income-earning potential
Let’s assume that she has gone through whatever money she had won, she has no job, and she has a significant amount of credit card debt. Let’s also assume that she has a car, some jewelry, and some valuable and expensive designer clothes.
Initially one would think that Chapter 7 bankruptcy is the appropriate way to go. Sure, she might have to turn over her jewelry; she might or might not be able to keep her car — depending on the amount of equity in it; and a trustee would probably not care about her clothes — even if they are designer duds. But she would be able to eliminate her debts.
However, not so fast. The U.S. Trustee might decide to look closer at the case for signs of “abuse.” The U.S. Trustee reviews each and every bankruptcy filing for this.
The U.S. Trustee considers future income-earning ability in determining whether a bankruptcy filing is abusive
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Knowing that Miss California is a celebrity very much in the news, the U.S. Trustee could argue that her Chapter 7 bankruptcy, where the objective is to discharge all debt, would be an abuse of the bankruptcy laws. They could argue that even though she may not have the ability to pay her debts now, her celebrity status and story could theoretically enable her to earn substantial amounts of money in the future.
After all, she can probably make a million dollars or more selling her autobiography, licensing the rights to her life story, or giving speeches at $25,000 a pop.
As such, the U.S. Trustee can argue that she has a great ability to earn substantial money in the future, even without the job of Miss California. They would then argue that if she wants to stay in bankruptcy, she would have to convert her case to one under Chapter 13, assuming her credit card debts are less than a $336,000, or even Chapter 11, if she cannot demonstate a regular monthly income, which is a normal requirement for Chapter 13 cases.
In Chapter 13, she would probably be called upon to pay back her creditors in full with a monthly payment plan, assuming that she was able to bring in sufficient income. If she couldn’t bring in the necessary income to fund a plan right away, or if her debts exceeded $336,000, she would instead have to file for Chapter 11 relief.
On the other hand, she could oppose the U.S. Trustee’s position by arguing that she has no plans to take financial advantage of her celebrity status, and that she would be in the poor house like so many other Americans who have been recently let go. If the bankruptcy judge found such a position to be credible, then she could get her Chapter 7 discharge and eliminate her debts.
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What can we learn from this hypothetical as it applies to consumers
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The sad fact is that today, many consumers are losing their jobs, and they can be from any economic class — lower, middle or even upper. In these recessionary times, not only are factory workers losing jobs; doctors who work as staff physicians in hospitals are being laid off, too.
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If a factory worker or an automobile salesperson loses his job, they would probably encounter no opposition from the U.S. Trustee in a Chapter 7 filing based on potential earning ability. However, if a doctor, who was earning hundreds of thousands of dollars a year, loses a hospital position, the U.S. Trustee would probably want to review the likelihood that the doctor could return to work soon at a substantial salary, even if it is not as much as the prior income.
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Thus many middle class Americans will have no problem filing for Chapter 7 bankruptcy relief; whereas a select few high-earners wil have to consider other bankruptcy options such as Chapter 11 and 13.
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Note: This post is a revision of my original post. One of my loyal blog readers brought to my attention that maybe I initially ribbed Miss California, a person of recent controversy in the news, too much. If I offended anyone, I apologize.
