Making millions of dollars or having celebrity status doesn’t do much to deter bankruptcy. Between 2008 and 2009, bankruptcy filings for those with more than $1 million in assets increased by 73%, and “Sports Illustrated” says that 78% of former NFL players go bankrupt within two years of retirement. Even some lottery winners go bankrupt after winning hundreds of millions of dollars.
But how is it possible that so many millionaires find themselves in bankruptcy court, scrambling to protect what little they have left? The answer may be in their stories. With all the celebrity millionaires (and billionaires) who have gone broke, we may be able to learn from their mistakes.
Celebrities Who Went Bankrupt
1. Donald Trump
The Donald and his different corporate entities have filed for bankruptcy four times: in 1991, 1992, 2004, and 2009. Each instance was a corporate and not a personal bankruptcy, which is often described as being the “restructuring of debt” and not going broke. But the fact remains that businesses associated with his name have needed financial assistance four times in the past two decades.
In exchange for getting some of these bankruptcies approved, Trump had to give up Trump Airlines, a mega-yacht, and an almost 50% stake in the Grand Hyatt Hotel. But even after all those filings, Trump currently has an estimated fortune greater than $2.7 billion, as he keeps his personal money separate from his business money.
The Takeaway Lesson: Establish yourself as a corporation to separate business funds from personal, and limit your liability should your business start to go under.
2. Michael Jackson
Even before his death in 2009, the King of Pop was recognized as the most successful entertainer of all time by the “Guinness Book of World Records.” But in 2007, Jackson filed for bankruptcy after not being able to pay back a $25 million loan on his home, Neverland Ranch.
Neverland, purchased in 1988 for the price of $17 million, had grounds containing a zoo, an amusement park, a movie theater, a railroad line, helicopter pads, and its own fire department. It reportedly cost more than $10 million dollars a year to maintain, and Jackson was well-known for his shopping sprees, including a $6 million trip recorded for the documentary “Living With Michael Jackson.”
Even after signing a nearly $1 billion recording contract in 1991 and selling more than 750 million records, Jackson had just 0.05% of his net worth in accessible cash, which left him no option but to file for bankruptcy.
The Takeaway Lesson: No matter your income or personal net worth, you cannot overextend yourself by taking on more debt or financing a grander lifestyle than you can afford.
3. M.C. Hammer
Best known for his 1990 hit “U Can’t Touch This,” M.C. Hammer was forced to file for bankruptcy in 1996 with $13 million in debt. M.C. Hammer earned more than $30 million in the early ’90s, but after purchasing a $12 million mansion with a paid staff of 200, along with a 40-plus person entourage, he soon found himself unable to support his luxurious lifestyle.
Add in two complaints of infringement of copyright, both settled out of court for undisclosed sums, and it’s easy to see why Hammer had to file for Chapter 11.
“My priorities were out of order,” he told “Ebony” magazine. He is now a pastor living in a ranch house in California.
The Takeaway Lesson: Even after making a fortune and losing it, you can successfully put your life back together if you use what you learned from your mistakes to make better decisions.
4. Mike Tyson
Once the most feared boxer in the world, Mike Tyson earned more than $400 million during his career. But his luxurious lifestyle, filled with mansions, wild animals, and a large entourage – combined with shady management and an expensive divorce – forced him in 2003 to file for bankruptcy, claiming debts of $27 million.
The Takeaway Lesson: Iron Mike could have saved himself from losing a large chunk of his fortune by preparing a prenuptial agreement prior to marriage. Even if you’re not raking in millions, a prenup can protect your assets or business from being decimated in divorce court. And considering that one in two married couples eventually separate, that’s not a chance you want to take.
5. Gary Coleman
Star of the TV program “Diff’rent Strokes,” Gary Coleman had to file for bankruptcy in 1999 after his parents and manager spent the majority of his money. Coleman had amassed $8 million in trust funds during his career as a young actor, but eventually discovered he had just $200,000 in cash to his own name.
His ongoing medical issues did not help his financial situation either, and Coleman died in 2010 after many years of financial difficulties.
The Takeaway Lesson: Gary Coleman’s story is different because he made most of his money as a young person, entrusting his parents to take good care of him. It’s a dangerous gamble to not be involved in managing your finances. And as Coleman came of age, he could have and should have talked to financial advisors outside of his immediate circle.
Though it’s hard to imagine family members ever stealing from you, when money is involved, it always pays to be careful.
6. Willie Nelson
Willie Nelson declared bankruptcy in 1990, owing the IRS $16.7 million in unpaid back taxes and fees. Depending on who you ask, either his accountants had not paid Willie’s taxes for years, or they had invested his money in tax shelters that turned out to be illegal.
To help pay off his tax evasion debt, in 1991 Nelson released an album titled “The IRS Tapes: Who’ll Buy My Memories,” and paid all proceeds to the government. He also auctioned off some of his memorabilia, and by 1993 he had finished paying the IRS all the tax he owed.
The Takeaway Lesson: There are creative ways to pay your debt to Uncle Sam, and the IRS is usually willing to work with debtors to make sure they get their money. So before you go into hiding on a small island because of a tax issue, check to see if you can set up an IRS payment plan. Willie wrote an album – what could you do?
Other Celebrities Who Filed for Bankruptcy
- Burt Reynolds declared bankruptcy in 1996, owing more than $11.2 million after an ugly divorce and some bad real estate investments. And in early 2011, Merrill Lynch Credit Corp. filed a foreclosure lawsuit against his Florida estate.
- Don Johnson of “Miami Vice” fame filed for bankruptcy in 2004 after City National Bank asked him for the $1 million he owed. His company, Timber Doodle Glade Equity Venture LLC, filed for Chapter 11 in order to protect his Aspen, Colorado home from being auctioned off to pay back the debt.
- Stephen Baldwin filed for protection in 2009, claiming he owed more than $2.3 million on a property worth only $1 million. Stephen isn’t alone in this; almost 29% of homeowners nationwide have upside-down mortgages.
- Tammy Wynette was a popular country singer in the 1960s and ’70s, but medical problems and bad real estate investments forced her into bankruptcy in 1988.
- Abraham Lincoln filed for bankruptcy twice in his life, as several failed businesses and personal loans from family and friends forced him to seek protection from the courts.
How Does This Happen?
Celebrities (and everyday people) commonly file for bankruptcy for the following reasons:
1. Lack of a Financial Education
Often, when you go from having nothing to having everything, a financial education is not part of the package. Learning how to save, budget, and invest can take years, and if you’ve never had substantial money before, you may never have learned these essential financial management skills. When handed huge checks to cash, many celebs go out and buy the biggest house and fastest car they can find, rather than learning how to properly handle their money.
Our culture is highly materialistic, and often engenders a mentality that encourages people to try to “one-up” each other with larger houses, more expensive vehicles, and the latest in fashion. However, this can lead to very costly behaviors that cannot be sustained.
Celebrities, like the rest of us, can get caught up in having the finer things in life. No one can blame them, but when the paychecks stop rolling in, it gets harder and harder to maintain that same standard of living.
3. Lack of Investment in Themselves
Many celebrities surround themselves with attorneys, accountants, and insurance professionals to help them with proper estate, tax, and insurance planning. However, in doing so, they often do not bother double-checking the work that is being done on their behalf, nor do they properly vet the financial professionals they hire. Not surprisingly, many fall prey to unscrupulous advisors.
Worse yet, some celebrities are taken advantage of by friends and family who they hire to manage their affairs. Unfortunately, greed can sometimes get in the way of these relationships.
4. Misguided Career Longevity Expectations
It might be easy to expect a successful Hollywood career to continue indefinitely. But sadly, most careers don’t last very long at all in that town. Living high on the hog while starring in a popular TV show is fun while it lasts, but not every actor picks up another well-paying gig immediately after their show is cancelled.
Because many celebrities do not commit to long-term financial goals, when the money stops rolling in, they become vulnerable to a host of financial struggles.
American bankruptcy laws seem especially geared to benefit the wealthy and knowledgeable. However, recent changes in the law require some high income filers to pay back at least a portion of their debt, and all debtors now have to receive credit counseling prior to a case being heard. Hopefully, these changes will make it more difficult for those looking for an “easy way out” to file for bankruptcy protection.
The important thing to remember is that, above all else, you must take personal responsibility for your financial situation, regardless of your net worth. Let the behavior of these celebs be a lesson to you – educate yourself, hire the right people, and act as though the money could stop coming in tomorrow. That’s a tried and true recipe to avoid bankruptcy.
Do you know of any other high-profile celebrities who have filed for bankruptcy? What lessons can you learn from them to ensure long-term financial well-being?
[photo credit: Paul Hakimata Photography (Donald Trump), Debby Wong (Donald Trump), Joe Seer (Michael Jackson and MC Hammer), Carla Van Wagoner (Mike Tyson), George Koroneos (Gary Coleman), Christopher Halloran (Willie Nelson), Shutterstock]