Celebrity bankruptcy is nothing new. Cyndi Lauper, Mike Tyson, Willie Nelson and Donald Trump – among others – have filed for bankruptcy protection at some point in the past. And right now, singer Toni Braxton is reportedly working out the terms of her second bankruptcy filing (the first was in 1998).

Braxton’s Chapter 7 case, filed last year in California, highlights some interesting Chapter 7 bankruptcy rules. Here’s a look at what she’s facing in court and what ordinary folks can learn about bankruptcy from her situation.

• Non-dischargeable debts: Some of the debts listed in Braxton’s Chapter 7 petition include those considered non-dischargeable in court. Tax debt, for example, often falls into this category (sources report that Braxton’s case included a debt of nearly $400,000 to the Internal Revenue Service). Chapter 7 filers may have certain debts excused, but they’re on the hook for repaying the non-dischargeable debts even after the end of the bankruptcy case.
• Exemptions: Chapter 7 bankruptcy filers are able to keep certain possessions out of the liquidation sale used to raise money for creditors. The specific exemptions filers get depend on their state of residence, but usually include a home, a car, clothing, work tools and other household necessities. In Braxton’s case, her lawyer has reportedly worked out a deal that will permit her Grammy awards and some other luxury items (like a Porsche and a piano) not usually protected in bankruptcy.
• Bankruptcy trustees: The trustee’s job in a bankruptcy case is to get as much money as possible from a filer’s estate and to use that money to repay creditors. In Braxton’s case, the trustee required the singer to work out a deal with the IRS for her tax debts. Sources note that, as of now, Braxton has agreed to make monthly payments to the government, which will have a lien on some of her more valuable possessions. This means that, if she falls behind on payments, the government can seize the property connected to the lien in lieu of payment.
• The goal of bankruptcy: Bankruptcy is intended to help filers eliminate debt while helping creditors recover as much of the money they’re owed as possible. In order to strike that balance, the court prioritizes some types of debt (like tax debt) over others (like credit card debt). A filer’s money (including any funds raised from selling non-exempt assets) is then distributed to the most important creditors first.
• Life after bankruptcy: While any number of external factors can lead a person to seek bankruptcy protection more than once, celebrities who file repeated bankruptcy petitions (especially those like Braxton, whose albums have sold millions of copies) remind us of the importance of making the most of the fresh financial start bankruptcy offers. After bankruptcy, filers must take steps to change their financial habits – otherwise, they’re likely to end up in bankruptcy court again.

The Wall Street Journal reported this week on a man whose bankruptcy case has outlived him. And he’s not too sympathetic a character: after defrauding clients of his business out of $19 billion, the man was reportedly put into federal prison.

Sources indicate that the fraudster, Barry Stokes, died in a hospital there before his bankruptcy trustee had been able to work through his case. As of now, reports note that:

• Hidden assets are still missing: This unsavory fellow apparently owned a lot of (somewhat) valuable art but hid it before his death. Most was found, but the trustee is still hunting some of it down. The proceeds from a sale of the art would go to his creditors.
• Liquidation won’t help much: Unfortunately, even though some pieces of the art could be worth upwards of $25,000, the money won’t do much for his debts of more than $30 million.

Fraudster Used Clients’ Retirement Funds to Buy Art

The details of this particular bankruptcy case are heartbreaking. Too often, individuals struggling with debt dip into their retirement accounts in an effort to stave off creditors and avoid filing for bankruptcy. And in many cases, people like this end up in bankruptcy anyway, without any nest egg for their retirement.

In this case, Stokes ran a business that managed people’s retirement funds and skimmed whatever he wanted from those funds for personal purchases. Now, his clients are his creditors in bankruptcy and have filed claims for more than $30 million.

The worst part? Because Stokes reportedly didn’t have much in the way of valuable assets, these people will likely not see much of their retirement money again!

Bankruptcy & Retirement Funds

For the record, retirement funds have a special place in bankruptcy:

• Exempt from creditors: Whether you file for Chapter 7 or Chapter 13 bankruptcy, the bankruptcy court typically will not go after your retirement funds during a bankruptcy case. The idea is that these funds will keep you financially sound in the future and so it’s in everyone’s best interest to leave them alone.
• Heavily taxed: What’s worse, people who withdraw retirement funds early face serious tax penalties. That means they don’t get the full benefit of the funds either in the present or the future!
• Irreplaceable: Most of us accumulate money for retirement gradually, over several decades. Using that money for debts can seriously damage your long-term financial health because it’s close to impossible to replenish the supply.

The bottom line about retirement funds: they’re safe in bankruptcy. If your nest egg is the only thing between you and the bankruptcy court, you might want to keep it safe and talk to a bankruptcy attorney about filing a petition.

A recent news article from LoanSafe.org tells the story of a woman who broke some important bankruptcy laws and ended up with almost $48,000 in fines to pay, on top of a five-year probation period. If that doesn’t sound like a good deal to you, read on to find out what she did wrong.

According to sources, the woman’s case worked like this:

• In 2005, the woman in question filed for Chapter 7 bankruptcy. Chapter 7 is designed to help filers eliminate certain unsecured debts without making creditor payments through a repayment plan (that only comes into play in Chapter 13 bankruptcy).
• As bankruptcy law requires, the woman testified to the completeness and accuracy of the information in her bankruptcy petitions as part of the Chapter 7 process.
• Before filing her bankruptcy petition, the woman apparently transferred a piece of property (worth more than $47,000) to her son. She did not mention this transfer in her bankruptcy documents.
• After the Chapter 7 case ended, the woman reportedly sold the “transferred” property and used the money to buy a home in a different state without reporting the proceeds of the sale.

Avoiding Bankruptcy Fraud

The woman’s crime was that she improperly transferred property with the intention of shielding it from the bankruptcy court. Had she proceeded lawfully without transferring the property, it would have been considered part of the bankruptcy estate.

Depending on the specifics of the woman’s case, the property might have been sold to raise money to repay her creditors in part; however, lying about the property ended up costing her in the long run.

One reason most insiders recommend that potential bankruptcy filers work with a bankruptcy lawyer is to help them avoid bankruptcy fraud, which includes all of the following.

• Reporting incorrect or incomplete information: While the bankruptcy court may excuse honest mistakes on paperwork, more serious “mistakes” will likely lead to some legal action.
• Attempting to repay a favored creditor before filing: Singling out one creditor (say, a family member or friend who lent you money) to repay before discharging other debts in bankruptcy is not allowed. Those who attempt to do so could face charges of bankruptcy fraud.
• Improperly concealing or transferring property: This could be considered a branch of the “complete and accurate” rule, but it deserves its own section. Attempting to hide or pretending to give away assets to shield them from bankruptcy is not permitted.
• Omitting known future income: Whether you’re expecting a tax refund or a hefty inheritance, it’s important to include it in bankruptcy petitions. Otherwise, you risk being charged with bankruptcy fraud.

As the story above illustrates, bankruptcy fraud is serious business: fines can get as high as $500,000 and those convicted may face jail time. Neither of those options sounds like a good way to get back on your feet financially.