Was it Smart for ‘Octomom’ to Declare Bankruptcy?

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Peter Kramer / NBC

Octomom has filed for Chapter 7 bankruptcy.

Nadya Suleman has made no secret of her financial troubles, which came to a head this week when the “Octomom” filed for bankruptcy. The mother of 14 owes creditors nearly $1 million, court papers showed, roughly 20 times as much as the value of her assets. “It is pretty extreme in terms of how much debt she has,” says Richard Hipp, manager of bankruptcy operations at nonprofit credit counseling organization InCharge Debt Solutions. The bankruptcy might give Suleman a fresh start, but the filing means that her creditors — which include a Christian school and her own father — are out of luck. 

Suleman filed for Chapter 7 bankruptcy, in which a debtor’s assets are liquidated and nearly all unsecured debt is discharged. This might seem like a more drastic option than Chapter 13, which lets filers hang onto some assets — such as a house or a car — if they agree to enter a repayment plan. Before filing, a person considering bankruptcy has to meet with an attorney and go through a means test, which helps determine which type of bankruptcy is most appropriate for them. The test compares the person’s monthly expenses and income to see how much is left over that could be used to pay off debt.

The means test aims to answer the questions, “Do you need to preserve property and do you have assets to pay back the creditors?,” says Hipp. In Suleman’s case, the answer would appear to be “no.” She owes her landlord $30,000 in back rent and the house where she lives now is facing a foreclosure auction; the owner says his credit has been ruined because Suleman’s lapsed rent payment caused him to fall behind on the mortgage payments. With assets of only around $50,000, there’s not much to go around to satisfy Suleman’s creditors. And even if her media exploits bring in significant income, the expense of caring for 14 kids is still considerable, although Suleman receives benefits including $2,000 a month in food stamps, according to the Orange County Register.

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Suleman’s large number of kids means that the trustee overseeing her bankruptcy is more likely to approve expenses much higher than the average family declaring bankruptcy would be allowed to claim. “It’s more reasonable that she would have a large house because she has all those children, so they can’t say having a large house is a luxury for her,” Hipp says. On the other hand, if a couple with no kids said they needed a four-bedroom house like the one where Suleman currently lives, they’d get shot down in a heartbeat. This is why families who want to stay in their homes often opt for a Chapter 13 bankruptcy, which can stop foreclosure proceedings.

Suleman’s career as a celebrity has been erratic, to put it nicely. Her most recent — and most lucrative, if you believe her — job offer has been to appear in a pornography video, and she recently posed topless in a British tabloid. Believe it or not, this helps her when it comes to bankruptcy in a couple of ways.

(MORE: Why Can’t You Discharge Student Loans in Bankruptcy?)

First, “there’s really nothing that would stop her” from filing Chapter 7, then turning around and accepting a gig with a huge paycheck as soon as the debts were officially discharged, Hipp says. Suleman isn’t exactly in a line of work like finance or law enforcement where a credit score torched by a bankruptcy is a liability. “You can’t prevent somebody from filing bankruptcy right now based on their future earnings potential,” he says.

The second reason Suleman lucks out is because the credit business does take her future income potential into account. “One of the ironic things about  how bankruptcy and the debt industry works is you can get approved for credit based on potential future earnings,” Hipp says. In other words, Suleman could be swimming in credit card offers shortly after she’s completed the bankruptcy process. After her Chapter 7 is completed, Suleman won’t be able to file another Chapter 7 for 10 years. Creditors know this, so they’ll view her as less of a risk.

Of course, overestimating how much Suleman could earn for being famous is probably what led to that million dollars in debt in the first place, Hipp says. “[Lenders] gave her a lot more credit than they ever should have because they kept expecting her to make that money year after year,” he says.

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