The Differences Between Bankruptcies: Chapters 7, 11, and 13
Recently, I met a prospective client with over $30,000.00 in medical debt. She lives with her one minor child and her annual household income around $40,000.00. She can pay her basic bills, but the massive medical debt is a different story. The collection phone calls are picking up and her stress level is beginning to affect her health. This same woman filed for Chapter 7 bankruptcy relief 6 years ago following a job loss, meaning that she would not be eligible for another Chapter 7 bankruptcy filing for 2 more years. She looks at me and says “If our President can file bankruptcy whenever he gets into a pinch, why do I have to suffer for 2 more years?” She recalled a news story saying that President Trump had filed bankruptcy at least four times prior to becoming our U.S. President.
So let’s see if we can address this disconnect as well as fact check just how many times President Trump has filed for bankruptcy relief. The young woman described above earns a modest income below the U.S. Median according to the U.S. Department of Justice. Her level of income allows her to qualify for Chapter 7 bankruptcy relief, meaning that her unsecured debts, including medical bills and credit cards, would be wiped out. Chapter 7 debtors can only receive a bankruptcy discharge once every eight years. Most debtors who do not qualify for Chapter 7 bankruptcy relief, find themselves in Chapter 13 bankruptcy, which is essentially a 3-5 year repayment plan for debtors with some degree of disposable income. Chapter 13 debtors do not risk liquidation of assets, however a monthly payment must be maintained.
Understanding the various chapters of bankruptcy relief may help shed some light on why Donald Trump has filed for bankruptcy relief many times. With this in mind, let’s look at what Chapter 11 bankruptcy means. Both companies as well as wealthy individuals may choose to reorganize their debts via Chapter 11 bankruptcy. A Chapter 11 bankruptcy debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. Such companies (or wealthy individuals) can remain open and continue to operate, but under the guidance and structures provided by our bankruptcy laws. The bankruptcy court ultimately approves a corporate budget and a related plan to repay the debts. Shareholders of larger companies involved in a Chapter 11 bankruptcy often find the value of their investments have declined. Chapter 11 bankruptcy is much different than it’s Chapters 7 and 13 cousins and is typically quite expensive. Those considering Chapter 11 bankruptcy relief should look for an attorney that specializes in Chapter 11 bankruptcies. In Nortwestern Ohio, it is estimated that Chapter 11 bankruptcies make up less than 1% of the annual bankruptcy filings.
Fact Checking: Has Donald Trump filed for bankruptcy relief 4 or 6 times?
Let’s do some fact checking about how many times Donald Trump has filed for bankruptcy protection and why there is some debate over this number. During the 2016 presidential campaign, Hillary Clinton correctly pointed out that Donald Trump had filed bankruptcy 6 times. Here is a quick breakdown of the six Chapter 11 bankruptcy filings by companies owned by Donald Trump. All six of Donald Trump’s bankruptcy filings were prior to him becoming our current U.S. President.
- 1991: Trump’s Taj Mahal
- 1992: First of two Atlantic City casinos owned by Donald Trump.
- 1992: Second of two Atlantic City casinos owned by Donald Trump.
- 1992: Trump’s Plaza Hotel in New York City
- 2004: Trump’s Hotels and Casinos Resorts
- 2009: Trump’s Entertainment Resorts
Since each bankruptcy case is assigned a unique case number and takes on it’s own life, there should be little disconnect between the number of filings related to any one person or entity. So Hillary Clinton claimed that Donald Trump filed for bankruptcy relief six times, while Mr. Trump rebutted with the number of four such filings. One possible reason for such a disconnect is whether Donald Trump recognizes his 1992 Chapter 11 bankruptcy filings as one, two, or three. The correct number of Chapter 11 bankruptcy filings related to Donald Trump in 1992 would be three, while Mr. Trump may perceive them as one larger event.
3 Lessons Learned:
- “The more money, the more problems”
- It’s not like wealthy people have cornered the market on personal problems. Just like the rest of us, they have to pay taxes, they use credit cards, they have mortgages, and they have car loans. Taking a step back, we can see that the problems are similar, just the amounts of money/debt are proportionately larger. Each April, many of us write a check to the IRS for taxes owed. Whereas we may write a check for $1,000.00, a famous Hollywood celebrity may be writing a check for $50,000.00. It’s a matter of proportions.
- “Separation of personal and business finances.”
- Whether you approve or disapprove, Donald Trump is a master at this concept. By keeping your personal and business finances separate, it may be possible for one to keep their assets, such as a nice home or an expensive car. This matter typically comes down to whether or not a business owner has personally guaranteed the business debt. Mr. Trump had only personally guaranteed such debts once, being the first bankruptcy filing in 1991. The take here is that one can file bankruptcy, but still have nice stuff. But it’s important to remember that most banks now require a personal guarantee by the company owner.
- “There is life after bankruptcy. “
- A bankruptcy filing does not define a person. There are many American success stories involving people who continue to move forward and realize their American dream. Walt Disney is a perfect example. Few people know that Walt Disney filed for bankruptcy relief in 1923. Well before Walt Disney became the icon that he remains today, he had an ownership interest in an animation studio named “Laugh-O-Gram Studio.” Mr. Disney’s first animation studio went bankrupt after it’s large financial supporter became broke. Disney did not quit and went on to build the global brand that we all know and love today.
- Fact Check: Trump Has Filed Chapter 11 Bankruptcy Six times., by Michelle Lee, Washington Post, September 26, 2020
- 7 Celebrity Bankruptcies and What You Can Learn From Them. by Jennifer Thomas, Resolve , April 11, 2019