How Celebrities Go Bankrupt

KAREN HARTLINE - SEP 2008

What do Burt Reynolds and Thomas Jefferson have in common? How about Kim Basinger and Gary Coleman? What about MC Hammer and... well I think that name tells you where this is going. They are all famous filers of bankruptcy and members of a long line of celebrity debtors. We look forward to their tales of woe on the last five minutes of the eleven o'clock news. We marvel at the details of each financial fiasco. One can't help but wonder how could such fortune turn into such debt?

If you ask Kim Basinger, she might tell you it was her weakness for the town of Braselton, Georgia. Basinger bought the town for $20 million around the time she dropped out of the movie Boxing Helena. While this might have been a wise career decision, the financial fallout was severe. After being sued for breach of contract, Basinger filed for bankruptcy and had to sell the town.

Mike Tyson might point his finger at his pet tigers. They were among the boxer's many outrageous purchases and accounted for over $8,000 of his debt. Of course, these innocent, caged beasts represented only a fraction of Tyson's lifestyle which demands $400,000 a month to maintain.

For Debbie Reynolds, bankruptcy stemmed from her hotel. The opening of the Las Vegas property, named none other than the Debbie Reynolds Hotel and Casino, made the perfect home for her extraordinary collection of movie memorabilia. However, her finances fell into bankruptcy when the casino flopped and Cleopatra's Headdress retired to storage.

Famous spending sprees are also to blame. Michael Jackson has been reported at various times to be in financial crisis. He's also famous for outrageous spending. He purchased ten artificial intelligence Sony AIBO dog robots at $5,000 each, and it takes over $200,000 a month just to maintain and run his home. The King of Pop dazzled the American populace when he shopped away $6 million within a matter of hours on the TV documentary "Living with Michael Jackson."

Robots, tigers and towns, oh my! While there are differences in the details, there does seem to be a common thread with these celebrity bankruptcies.

In a recent New York Times article, former comedian and director of the film PhatBeachexplained the typical Hollywood financial story. "When you make money in this town it's very fast, and it feels like it's never going to end," said Mr. Ellin. "I've done it myself. I've been the idiot who was spending money and then thought, 'Wow, I haven't had a job in two years.'"

Parents try to raise fiscally responsible kids by repeating clichés like "money doesn't grow on trees." Apparently, it doesn't even grow on the trees behind the houses on MTV's Cribs. Show business is a winner-takes-all career. When celebrity hits and the paychecks roll in, they don't come with sound financial advice attached. Many of those who do strike it rich are suddenly so deep in wealth they don't consider reaching the horizon.

Evan Bell is a business manager who represents a number of Hollywood newcomers. He recently told the New York Times, "When the agent says, 'No one read that bad review' and that 'it doesn't matter,'" his job is to be the voice of reason. "I say, 'You got a bad review — don't buy that new car.'"

Athletes aren't immune to delusions of eternal wealth either. Derek Sanderson, a former football star, is one of the most famous for this misconception. In 1972, he signed a contract for a record breaking $2.65 million and lost it all to alcoholism and a string of bad investments. Back on his financial feet, he now advises athletes who find themselves in this daunting position of wealth.

"Almost every player is not conscious of the fact that it will end," Sanderson says. Of his work as a business manager at Boston's State Street Research he says, "We educate the players as to what risk is. Once you show the player how quickly the money can go, they get a good sense of calming down."

Being a financial tamer sounds easier than it actually is. One Hollywood financial advisor, Scott Feinstein, told the New York Times about a call he received from a client in his mid-twenties who wanted to buy a $35,000 watch. "I said 'What time does it say?' and he said, 'Ten minutes after 3.'" Feinstein recalled. "I told him, 'Mine says 10 after 3 too, and it cost me 60 bucks. Put the watch down.'"

Of course, one $35,000 watch does not pave the road to bankruptcy. The problem occurs when exorbitant spending goes from isolated incidents to a must-have lifestyle. Apparently, when MC Hammer sang "Can't Touch This," he was not singing about his money. The famed rapper's forty-member entourage outspent his $33 million income on lavish day-to-day living.

Though some of these anecdotes may ring familiar, you probably don't think of any of these celebrities as actually suffering financially or sleeping out on the streets. Burt Reynolds, despite his $8 million in debt, kept a house that was valued at over $2 million. Kim Basinger certainly never looked like she was having any financial difficulty.

Filing Chapter 7 bankruptcy was a way for these debtors to wipe the slate clean and basically avoid paying their bills. The number of filers increased dramatically over the course of the nineties. For this reason, bankruptcy laws were challenged in 2001, and a new bill was put into place. Such a bill had faced contention in legislation due to the demographics of most bankruptcy filers. "This is a class issue, these are poor people we are talking about," said Senator Paul Wellstone, Democrat of Minnesota in a call for compassionate conservatism.

But other Democrats charged that passing the bill was a form of payback to corporate America. They thwarted cases, such as those of Kim Basinger and Toni Braxton, which seemingly took unfair advantage of the law as it stood.

CNN Congressional Correspondent Kate Snow reported on changes to the federal bankruptcy code. She claimed the most significant aspect of the new bankruptcy legislation would be that filers would be subject to a "means test."

"Anyone making over a certain amount of income would be forced to file under Chapter 13 rather than under Chapter 7 bankruptcy." said Snow. "This means that they would have to pay off some or all of their debt - they would not be able to wipe the slate clean."

So, is it working? Well, perhaps the fact that Tyson filed for chapter 11 due to his earning potential is evidence of justice for the average debtor. The fighter is planning a comeback, however. Not many others could so confidently boast of such a possibility with $40 million dollars in bills looming overhead. Perhaps recent changes to the law will make it more of an uphill battle for Tyson than it was for famed financial fumblers of the past.