The Strategy of Bankruptcy

Ryan Bhandari |

Bankrupt.jpg

We just put out of a list of 50 Cent and other celebrities that have filed for bankruptcy protection. The question, though, is “Why do they do it?”  Is it simply because they have debts that they can’t pay, or is there a strategic aspect of declaring bankruptcy? What does the term “bankruptcy” even mean to begin with? Most people have probably heard of things like “Chapter 7” and “Chapter 11,” but few truly understand the complexities and nuances behind it. Hopefully, in this article, I can answer all of these questions and get a better understanding of Fiddy’s strategy. 

Chapter 7 vs. Chapter 11

Before delving into the strategy of declaring bankruptcy, it’s important to explain the two most common types of bankruptcy and what they mean.

  • Chapter 11 is sometimes referred to as rehabilitation bankruptcy. It allows firms and individuals the opportunity to reorganize their debt and reemerge in good fiscal condition. In this form of bankruptcy, firms and individuals will contact their creditors in an attempt to change the terms of their loans – such as principle payments or interest rates. Importantly, debt is not absolved in Chapter 11. The restructuring process only changes the terms of the debt, but the firm or individual must pay down the debt through future earnings.
  • Chapter 7 is referred to as liquidation bankruptcy. Firms that experience this form of bankruptcy are past the point of reorganization and must sell-off, liquidate and un-exempt assets to pay creditors. In Chapter 7, creditors receive their debts according to how they loaned out money to the firm or individual. People who declare this kind of bankruptcy are generally seeking a way to get out of their current liabilities. However, this form of bankruptcy does wipe out most taxes, school loans, or child support/alimony. Importantly, if an individual wants to keep a house or a car, he/she must continue to make payments on that item.

The Advantages of Chapter 11

The popularity of Chapter 11 among celebrities and corporations should not be surprising. Chapter 11 allows business to continue as usual. It allows individuals to keep most of their assets, and for 50 Cent, it could give him the opportunity to negotiate a different settlement with Lastonia Leviston – the woman to whom 50 Cent was ordered to pay $5 million in damages last week.

As mentioned earlier, in this form of bankruptcy, individuals can contact their creditors in an attempt to change the terms of payment. 50 Cent will certainly be contacting Lastonia Leviston in an attempt to negotiate a smaller settlement. However, a court must approve all of these negotiations based on the current fiscal situation of the individual in question.

Last year, Forbes estimated 50 Cent’s net worth to be $155 million. Now he’s claiming that he has more debt than assets, meaning that $155 million has effectively disappeared. Naturally, this comes across as rather suspicious.

But 50 Cent won’t get a debt restructure approved by the court if he actually does have the money to pay down his debts, including $5 million to Lastonia Leviston. So either 50 Cent made some absolutely horrible investments in the last year that wiped out nearly all of his net worth, or this is a ploy to delay or somehow avoid payment to Leviston altogether.

Bankruptcy is a Good Tool

All in all, Chapter 11 bankruptcy is a very useful strategy, and a good tool for many people who have mounting debt. Generally speaking, individuals get to keep their house and car, as well as continue working and living their normal lifestyle. This strategy has been good for corporations and celebrities, but also for regular people who have fallen on hard times.

Like any good tool though, there’s a possibility of exploitation. To be fair, there is no solid evidence that 50 Cent is exploiting Chapter 11 bankruptcy protection, but let’s just say that the circumstances are a little murky in this particular case.

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