Why Kelly Rutherford’s bankruptcy should make you more prudent about your finances

Kelly Rutherford is an actress. Not just an actress, but a working actress. She is not a familiar looking extra or an actress who Kelly Rutherfordfrequently guest stars on television, but someone who has appeared as a series regular on multiple high profile shows since the 1990s. She recently ended a six-season run on the CW hit “Gossip Girl.” This all makes the recent revelations of her bankruptcy that much more surprising. How does someone who has made it in an ultra-competitive, well-compensated field end up with over $2 million in debt? There are several lessons that we can learn from Kelly Rutherford’s unfortunate bankruptcy.

1. Divorce not only has an emotional cost, but can also have a steep financial cost The vast majority of Kelly Rutherford’s debt is related to her divorce and custody battle with her ex-husband German businessman Daniel Giersch. The legal battle with her ex-husband has cost her over $1.5 million.If you are considering getting a divorce, be cognizant of the fact that divorce proceedings may end up being expensive. Between attorney fees and court costs, your expenses can quickly ramp up. Try to have an objective assessment of how you expect the divorce proceedings to go. Do you expect the divorce to be amicable or acrimonious? If you have children, do you expect that you and your spouse will battle for custody? Do you have a plan in place to divide the marital assets? The more questions you can answer and plan for before divorce proceedings occur, the better chance you will have of keeping your costs down.

2. Have a plan for paying your taxes

In addition to the $1.5 million in legal fees, Kelly owes $350,000 in income tax for 2012. For the majority of us, paying taxes is simple. Your company automatically takes deductions out of your paycheck that pay for your income tax.

If you are a contractor or self-employed, it’s important to remember that not all the money you earn is yours. Make sure to set aside a certain percentage of each paycheck that you will use to pay your taxes at the end of the year. Try to estimate your expected income and taxes for the year and set up a separate account that you can use to settle your tax bill. If possible, get some guidance from an accountant on how to pay your estimated taxes quarterly.

3. Set up an emergency fund

Kelly works in a profession in which rapid changes in income are quite common. One month you are earning $40,000 per month for being on a hit show, the next month your character is written off the show or the show comes to an end and you no longer have any income coming in. In any field in which income tends to drastically change, it is especially important to set aside an emergency fund to help account for the uncertainty in income stream.

While the majority of us likely have more certainty about how much we expect to earn in the future, it is still important to set aside some funds in an emergency account. Whether you are an actor or an office worker, there is always some uncertainty about the future, and having an emergency account can make it easier to ride the ups and downs as you encounter them.

While Kelly Rutherford’s bankruptcy is sad and alarming, there are lessons we can derive from it to make us all more prudent about our financial future.

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Corporate Bankruptcy Hurts Employee’s Most

Seal of the United States bankruptcy court. Ch...

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This is a guest post from Hunter Montgomery. He writes for Financially Consumed on every-day personal finance issues. He is married to a Navy meteorologist, proud father of 3, a mad cyclist, and recently graduated with a Master’s degree in Family Financial Planning. Read his blog at financiallyconsumed.com.

Bankruptcy has evolved from something that people and businesses were deeply ashamed of a few decades ago, to a seemingly acceptable path to restructuring; towards a more sustainable future. Bankruptcy is so common in corporate America that it is referred to by some as an acceptable and necessary business tool.

This bothers me on a number of levels, but mainly because corporate bankruptcies hurt the humble employee the most. The laws are supposedly designed to help the company stay in business, and continue to provide jobs. But at what cost to those employees?

When a company declares bankruptcy, they are essentially admitting to the world that they failed to compete. Their business model was flawed, they were poorly managed, and they simply did not organize their resources appropriately to meet their consumer needs.

Given this failure, it shocks me, that bankruptcy laws are designed to allow management to get together with their bankers. They essentially protect each other. Management is obsessed with holding on to power. The bankers are obsessed with avoiding a loss.

The bankruptcy produces a document called first-day-orders. This is a blueprint for guiding the organization towards future prosperity. But this is essentially drafted by the existing company management, and their bankers. Do you see any conflict of interest emerging here?

Bankers are given super-priority claims to the money they have loaned the company. Even before employee pension fund obligations. This is absurd. Surely if they loaned money to an enterprise that failed, they deserve to lose their money.

Management generally rewards itself with large bonuses, after declaring failure, paying off their bankers, shafting the employees, and finally re-emerging with a vastly smaller company. This is ridiculous.

The humble employee pays the highest price. Assuming there is even a job to return to after restructuring they have likely given up pay, working conditions, healthcare benefits, and pension benefits.

This is exactly what happened at United Airlines in 2002 after they filed for chapter 11 bankruptcy protections. The CEO received bonuses, and was entitled to the full retirement package. The banker’s enjoyed super-priority claims over company assets to cover their loans. Meanwhile, the employees lost wages, working conditions, healthcare benefits, and a 30% reduction in pension benefits.

An adjustment like this would force a serious re-evaluation of retirement plans. For most people, it would require additional years in the workforce before retirement could even be considered a real possibility.

Employees of General Motors, which recently went through bankruptcy proceedings, also had to give up significant healthcare benefits, and life insurance benefits. Entering bankruptcy, it was the objective to reduce retiree obligations by two-thirds. That’s a massive cut.

The warning to all of us here is that we must do everything possible not to fall victim to corporate restructuring. Save all you can, outside of your expected pension plan, because you never know when poor management, or a terrible economy, will force your employer to file bankruptcy. Always plan for the worst possible outcome.

It’s a competitive world and it’s quite possible that the traditional American system of benefits is uncompetitive, and unsustainable in the global market place. The tragedy of adjusting to a more sustainable system is that the employee suffers the most.

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Debt Options

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When you’re buried in debt, bankruptcy can seem like the only option.   When you get make ends meet, no matter how hard you pull on them.  When bill collectors interrupt every dinner.  When you have to choose between food and rent.   When there is always more month than money.  Do you have another choice?

Yes, you do.

Before you rush to file bankruptcy, take the time to understand your options.

Debt Settlement

Debt settlement is when you quit paying your bills and start sending the money to settlement company.  The settlement company does…nothing.  Really.   They take your money and drop it into investments or interest-bearing accounts.  You don’t get the interest, they do.  Eventually, when your creditors are howling, the settlement company offers to make a settlement on the account.   If the creditor accepts pennies on the dollar to kill your debt, the settlement company pays them.  If not, they get to howl louder and make you more miserable.

While this process is playing itself out over years, your credit is taking a beating.  You are doing nothing to dig yourself out of the hole you’ve dug.  Finally, when your creditors are so desperate that they accept the settlement offer, you get a huge additional hit to your credit.   “SETTLED IN FULL” is not a good status to have on your credit report.

Debt settlement companies do nothing you can’t do for yourself, and doing it for yourself at least lets you keep the interest your money is earning.

Debt Consolidation

Consolidating your debt comes in two varieties, a debt consolidation loan and a debt management plan.

A debt management plan is when you send one large payment to a debt consolidation company, and they pay your creditors for you each month.    The company will usually attempt to contact your creditors and negotiate your interest rate and payments to try to get you into a situation that precludes bankruptcy and will keep your creditors happy.   In the simplest terms, this is a debt payment consolidation.

A debt consolidation loan is generally done by taking out a line of credit against your home or other collateral and using that money to pay off all of your bills.   Then you make the payments to the bank, to pay off your line of credit.   The problem is that, if you can’t make the individual payments, can you make the payment to the line of credit?  If you can’t, you risk losing your house.

Repayment

This option is my personal favorite.    It involves taking responsibility for your decisions, cutting out the unnecessary expenses in your life, and paying your bills.  There are a few popular plans for accomplishing this, including Dave Ramsey‘s debt snowball.   The most important thing to remember are 1) debt it bad so stop using it; and 2) pay off as much as you can afford to each month.  It isn’t as sexy as making all of your debt disappear, but it’s still a good option.

Bankruptcy

Let’s see.  You borrow money on the promise to pay it all back.   After you borrow too much, you renege on your agreement.  You admit your word means nothing and you get all of your debt cancelled, forcing your creditors to raise the interest rates for all of the responsible debtors out there, as a way to balance the risk of those who will never pay.  In exchange you doom yourself to lousy credit for the next 10 years.  In extreme circumstances, bankruptcy may be the only option, but, I’m not a fan.

As you can see, there are almost always better options than bankruptcy.   Please, before you take that leap, look into the other choices.

This is a sponsored post written to provide some insight into the world of bankruptcy and debt consolidation.

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Filing Bankruptcy: Pride or Shame?

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I’m a big fan of personal responsibility.  If you’ve promised to do something, you should do it. With that said, it seems odd to some people that I don’t have an ethical problem with bankruptcy.  For some people, it is the only option after a long series of problems.

Don’t get me wrong, it should be a shameful decision. Reneging on your word should never be a source of pride.  It should be a difficult decision to make.   A couple of years ago, I came very close to making that decision myself.

It should not be a reason to celebrate and it should absolutely not be a reason to behave irresponsibly.  Some people don’t see a need to take care of their responsibilities because, when it gets bad, they’ll be able to file bankruptcy and make the creditors go away.  They are abusing a safety net.  That abuse hurts everyone.   Credit card companies have to charge higher interest rates so the paying customers can cover the risk of those who default or file bankruptcy.

There is one prominent local bankruptcy attorney who files every 10 years, and has filed consistently for decades.   He runs a thriving practice, so it’s not a matter of poor choices, it’s a matter of deliberately living beyond his means and screwing his creditors.  He’s one of the slime-balls that give lawyers a bad name. He is one of the many who abuse a lifeline designed to save people from a life of destitution they didn’t ask for, and he does it to finance his extravagant lifestyle.

If you have found yourself buried in a debt you didn’t plan for, if life threw you a curve-ball that you are entirely unable to deal with, if you have to file bankruptcy, it’s okay.   Really.   When you go in front of the judge, have the decency not to enjoy it, and try to learn from the experience.

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