high-profile multi-millionaires and billionaires going bankrupt always makes for entertaining
headlines but none of these stories ever seem to end up with these people giving up their
mansions and working a minimum wage job rappers boxers and even former presidents have all gone
bankrupt at one point or another and yet outwardly it looks like nothing has changed for them worse
still there are people like jordan belfort who have been forced into bankruptcy because of the
criminal nature of their fortunes yet are still living lives that you or i could only dream of
so what gives are the rules different for the rich even when they are going broke or is this just
another example of rich people using their army of lawyers to get out of taking responsibility
well believe it or not it's actually so much worse than that bankruptcy is yet another thing that is
a great tool if you are rich but a horrible curse if you are poor in fact certain high-profile
bankruptcies have left filers better off as a result of what is supposed to be a financial
game over so it's time to learn how money works to find out how billionaires use bankruptcy to their
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below now back to our bankrupt billionaires the first way that these people protect themselves is
by having companies go bankrupt on their behalf a company is just a separate legal entity from
its owners the owners own shares in the company and even if just one individual person owns every
single share the liability is limited to the value of those shares this is why some companies have
limited at the end of their names in plain english if someone starts a company and invests a hundred
dollars into the business as the sole shareholder they can almost never lose more than that 100
that they put in if the company goes to the bank and gets a million dollar loan and then
instantly defaults on that loan then the bank can force the company into bankruptcy and take the 100
that the investor initially put in but they can't come after the owner themselves for
any of their personal property apart from those shares this system is put in place because it
encourages people to invest into businesses imagine how many people would buy shares on
the public market if there was a chance that they could get debt collectors put on them
if they were unlucky enough to be holding shares in a defunct business the only time
an individual can ever be held liable for the debt of a company is if they are an executive
or a director who engaged in criminal activity or kept the company running after it became insolvent
that last point can unfortunately hurt a lot of well-intentioned business owners who think they
can get through tough times if only they could keep their doors open for just one more week those
good intentions often turn into repossessed homes to cover unpaid wages of course billionaires who
don't even know the meaning of good intentions are perfectly happy to let their businesses go
bankrupt once their usefulness has run its course particularly opportunistic billionaires might even
use the corporate liquidation as an opportunity to buy the old company's assets at a discount
in certain industries particularly construction it is common practice to start a new company
for every new project the company will raise money from a pool of investors or a larger
holding company and then borrow money on top of that from a bank the new company will then hire
all the builders and contractors to construct the project and pay them from a pool of funds
once the project is finished the company will sell the building as apartments or office space and
return all the money raised back to the bank with interest and then to the shareholders the benefit
of doing it like this is if the project goes over budget or becomes unprofitable the shareholders
can cut their losses and it's the bank and the contractors who end up losing the most whether
you hate them or love them donald trump is the master of this style of business structuring every
project he starts will be self-contained in its own individual company which is why you can read
stories about him having declared bankruptcy six times over yet he still lives in a penthouse with
a bathroom that would make an early 2000s rapper blush the creative use of corporate structures
is not the only way that multi-millionaires and billionaires spin bankruptcy to their advantage
because even when they personally have to declare bankruptcy they still have a big advantage over
regular people that's because there's not just one single type of bankruptcy there are actually
six different types chapter 7 9 11 12 13 and 15. the type of bankruptcy that normally people are
most likely to fall into is chapter 7. this is typically a monopoly style bankruptcy
a court will appoint a trustee to your case to liquidate all of your assets and use the
proceeds from those sales to pay back your creditors the trustees will normally but not
always leave bankruptees with some essentials like their car in their home but this is not
guaranteed if these assets are considered luxuries beyond providing basic needs if a bankruptcy has
a mortgage or car loan which is secured by their home or their car a chapter 7 bankruptcy will not
protect them from foreclosure or repossession if the filers are allowed to keep these assets
they will need to find a way to keep these loans paid or negotiate with these lenders separately
most chapter 7 bankruptcies are what are called non-asset cases which means the bankruptcies have
lots of unsecured debt and no assets worth selling to pay back the loans in these cases what can't
be reasonably paid back is forgiven with a few exceptions like unpaid taxes and student loans
all other creditors are forced to write off the debt so they will lose that money for good chapter
7 in theory is a fresh start for people but in reality it's often not so smooth getting a job
can be difficult with bankruptcies on your record and you can't claim bankruptcy again for another 8
years which means recent bankruptcies often have bigger problems with less honest lenders shortly
after going bankrupt in fact some lenders actually target recent bankruptcies because they know they
can't claim bankruptcy again as if it wasn't bad enough some people are simply too poor to file
for bankruptcy in most states the court-appointed trustee does not come free and filing bankruptcy
successfully will require a lawyer who for obvious reasons will ask for payment up front but chapter
7 is for the poor people rich people will instead prefer to use chapter 11 bankruptcies chapter 11
is when the court will look at an individual or business income assets and liabilities and
attempt to reorganize them to continue to pay off the debt in a way that satisfies all parties this
might mean selling some assets but it might also mean that the creditors agree to longer payback
terms to lower the monthly payments enough for the bankruptcy to make consistent payments again
chapter 11 uses the court system as a mediator to negotiate new deals between debtors and creditors
it also uses the court system as an enforcer to make sure that both sides of the bankruptcy
adhere to the conditions of the bankruptcy once it is set out complex bankruptcies can
take months of negotiating and thousands of hours of court time and thousands more available hours
for the lawyers negotiating the terms which means this type of bankruptcy is ludicrously expensive
spending half a million dollars in legal fees to renegotiate 40 000 in credit card debt doesn't
make sense so chapter 11 is not a luxury that regular people can afford spending half a million
dollars in legal fees to renegotiate 40 million dollars in debt does make sense though and if the
bankruptcy has good lawyers on their side they can often negotiate better terms than they had before
the filing without needing to sell as much as one measly lamborghini the creditors are in most cases
happy to negotiate in a chapter 11 filing because it eliminates the chances that the bankruptcy is
forced into a regular chapter 7 bankruptcy where they may be forced to forgive the debt entirely
a good lawyer can often negotiate such favorable terms on a chapter 11 filing that the individual
filing for the bankruptcy can be financially better off under the newly negotiated conditions
now as i mentioned there are four additional types of bankruptcy but those are very narrow
in what they focus on chapter 9 bankruptcy for example only applies to municipalities who are
going bankrupt so not at all useful unless you are the mayor if you want to go and learn about
the technical details of these other types of bankruptcy go and talk to an actual lawyer if
instead you want to experience bankruptcy firsthand go and watch my video on meme
stocks and the wall street firms that are secretly propping up this idiotic market a special thanks
again to the daily upside for making it possible for everybody to keep on learning how money works