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Stories of Warren Sapp’s bankruptcy filing has been all over the news lately. It’s hard to imagine he’d find himself in such a predicament. After all, he’s a pro-bowler with at least $40 million in career NFL earnings. He has a good job as a very entertaining television analyst which has led to other money making endeavors, such as Dancing with the Stars.
Unfortunately, Warren Sapp is just the most recent of a long line of NFL players who have gone broke after their NFL career. According to a 2009 Sports Illustrated article, 78 percent of NFL players go broke 3 years after their playing careers end. Which is especially bad news because the average career of an NFL players is only 3.5 years.

Why does it happen? First off, only a very few will ever make the same money they made during their career. And while they are making the big bucks, they get sucked into bad investments, pursued by freeloaders and an entourage looking for handouts, and are barraged with bad advice from people they think they can trust. Add to that, football has taken a big toll on their bodies so medical problems start arising. Plus, they are young kids who suddenly have the money of their dreams and what they’ve worked for years. Of course they’ll want to show-off a bit and live the life of movie stars.
So, to the NFL Class of 2012 (or to anyone else who has suddenly come into large amounts of money), here’s what to remember:
1) Plan for the Worst. Celebrate now. You deserve it. But, your earning and your career depend on many things all working together for a number of years, including your health, your skills, the offense or defense your team runs, your coach, hungry rookies and free agents in coming years, and countless other events that may be beyond your control. Even in a short career, you may make more money than most Americans make over their lifetimes. Spend some now, treat yourself but don’t continue to overspend. But plan to make the most of it rest last your life.
2) Your Agent Shouldn’t Advise You on Your Money. Agents should never be your source for financial advice. It’s not their expertise. They are great at what they do- negotiating your deal. But, just as you don’t want a DT kicking field goals, you need an outside person to handle your money (preferably not a family member or a friend unless that was their business before you signed your contract). Too many financial disasters are the result of bad advice from agents who get in over their heads.
3) No Private Investment or Real Estate Deals. You are now a target of people looking for easy money, These people are smooth talkers and put on a good show telling you about guaranteed profits in real estate and investments. But, remember no one is going to give you money just because of who you are or what team you play for- they want your money. They’ll use your money to pay themselves a good commission and could care less whether the deal is real or one that will pay off (if the deal was even real in the first place). Even when your friends come to you with deals, be skeptical about who contacted them. Stay away from private investment and real estate deals. Too many things can go wrong, business deals are not your expertise- just ask John Elway (lost $3million to a hedge-fund manager who was arrested on charges that he ran a Ponzi scheme), Mark Brunell (filed bankruptcy after failed business ventures, including 12 Whataburger restaurants), or Deuce McAllister (lost bigtime in car dealership.
4) USE PROTECTION. Child Support payments continue until the child grows up.  You’re old enough now to know that you are on the hook for an unplanned pregnancy, not matter what is said in the heat of the moment.  The major reason behind the financial problems of Warren Sapp, Chris McAlister, Travis Henry and many others are the child support payments. These payments are often valued at the height of a playing career and can be $5000 to $10000 a month. And, guess what, you have to keep making these payments for over 20 years. Warren Sapp is over $728,000 behind in child support payment and is required to pay about $75,000 a month. Bankruptcy won’t help him with those payments either.
5) It Can Happen to You. You’ve been a star your whole life. You know deep inside that you will continue to be a star and your career will continue until you’re 40 so money will never be a problem. I hope that’s the case. Then, you won’t have to worry. But, still, don’t you think that a little prior proper preparation is worthwhile- just in case.

What are the qualifications for an individual/couple to file for Bankruptcy?  The answer to this question is simple  -- there are no qualifications for filing Bankruptcy.  Everyone has the right to file a petition for relief under the Bankruptcy Code.  All one has to do is file a Petition for Relief with the Bankruptcy Court.  What type of bankruptcy an individual/couple can file does have certain qualifications.  For most of us, the choice is between filing a Chapter 7 bankruptcy in which one requests relief in the form of debt forgiveness of most of his/her debts or Chapter 13 bankruptcy in which one agrees to pay all or a portion of one’s debts over a period that varies between 3 to 5 years with certain exceptions such as your home mortgage.  How much gets paid back depends on how much “disposal income” a person has.  In general, this means how much money you have left over after paying your monthly expenses without considering the debts to be included in the Bankruptcy.
 In 2005, the Bankruptcy Code amended one of the major features of which was to require a person to meet an income and expense test in order to qualify for Chapter 7.  This test is known as the “Means Test”.  Certain classes of people are exempt from the Means Test such as if a person’s debts are more than 50% business related and certain types of income are excluded such as social security income.  If you do not qualify under the Means Test to file a Chapter 7 then you have the option of filing a Chapter 13.  If you qualify under the Means Test then you can file a Chapter 7 or a Chapter 13.  The Means Test is divided into two (2) distinct parts.  The first part is based strictly on  gross income for the six (6) months preceding the filing of a Bankruptcy case.  How much gross income allowed is dependent upon what state the person lives in and the size of the family unit.  If one exceeds the gross income test then the second part of the test comes into play which takes into consideration certain deductions, some of which are standardized and some of which are variable.  For example, housing.  If one rents then a deduction for housing is standardized based upon the county in which a person resides. If you own a home a deduction is allowed for the full mortgage payment including escrow for insurance and taxes.  There are standardized deductions for food and a variable deduction allowed for contributions to one’s church.  At the end of the second part of the test a determination is made as to whether a person has sufficient disposable income to pay a percentage of unsecured debts to creditors.
 In general, anyone can file Bankruptcy but must meet certain qualifications to file Chapter 7.  There are other types of bankruptcy that addresses certain specific situations such as chapter 12 which deals with farmers that are experiencing financial difficulty, Chapter 11 for businesses and  individuals with special problems.  For most of us, the choice is between Chapter 7 and Chapter 13 of the Bankruptcy Code.

California has three separate statutory provisions that prohibit a lender from obtaining a deficiency judgment after foreclosure.  These provision are found at Cal. Civ. Proc. § 580b, Cal. Civ. Proc. § 580d in conjunction with Cal. Civ. Proc. § 726(a), and after July 15th, 2011, Cal. Civ. Proc. § 580e.  A deficiency is simply the loss that a lender sustains after the property is foreclosed.  The deficiency is measured by the difference between what is owed on the loan and what the bank collected from selling the property after foreclosure. A deficiency judgment after foreclosure may result in a wage garnishment, bank account levy, and a judgment lien against other property owned by the borrower.  Because of the seriousness of a deficiency judgment sound legal advice should be sought out whenever foreclosure appears imminent.
If a borrower is facing an imminent foreclosure or has already had a property foreclosed and one of the California statutory provisions to be discussed below is not helpful a bankruptcy discharge may be the only means of averting the negative consequences of a deficiency judgment. In reviewing options with a client as a bankruptcy attorney, I always start with non-bankruptcy law.  With that in mind I summarize the non-bankruptcy protections found in the California anti-deficiency provisions.
The first statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580b. Cal. Civ. Proc. § 580b protects a borrower from a deficiency after foreclosure where the property is occupied by the borrower as a personal residence and where the money borrowed from the lender was used for the purchase of the property.  This provision does not protect a borrower where the property is not a dwelling occupied by the borrower or where the loan was not part of the financing used to buy the property.  Specifically this provision does not protect a borrower if the loan was a refinance loan or an equity line of credit.
The specific language of  Cal. Civ. Proc. § 580b reads as follows: “[n]o deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser. 
The second statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580d. Cal. Civ. Proc. § 580d in conjunction with Cal. Civ. Proc. § 726(a) is often referred to as the “Single Action Rule.”  Basically what this means is if a lender non-judicially forecloses on the property (power of trust deed sale) they may not later seek a deficiency.  Practically speaking this means that in over 99% of foreclosures by a senior lienholder (the holder of the first Trust Deed) the senior lienholder will not be able to collect a deficiency.  However, note in rare cases where the property has very little value or no value and or if the borrower has independently very deep pockets the lender may choose judicial foreclosure and after the foreclosed property is sold obtain a money judgment for the balance of the loan.   One of the reasons that judicial foreclosure is rare in California is that it can take the lender much longer to ultimately foreclose on the property.
Another problem with the “Single Action Rule” is that it does not protect the borrower from being sued by a junior lienholder who either waives their right to foreclosure or sues after the property is foreclosed by the senior lienholder. Very frequently, a borrower will wind up owing a deficiency to a junior lienholder after the senior forecloses where the junior lien arose out of a home equity line of credit or from a refinance that included a second.  The term that is often associated with this a “deficiency from a sold out junior lienholder.” However where there is a “sold out junior lienholder” there is case law that may still prohibit them from collecting on the deficiency.  One California appellate case holds if the senior lienholder and the junior lienholder are one in the same than the foreclosure by the senior lienholder precludes the collection of a deficiency by the junior. The junior lienholder is deemed to have sold itself out and elected its sole remedy on CCP 726(a). Simon vs. Superior Court, 4 Cal.App.4th 63, 5 Cal.Rptr.2d 428 (1992).  Taking this one step further the California Court of Appeal recently held that where the senior and junior are owned by the same bank that an assignment to another lender of the junior after foreclosure does not allow the assignee to collect a deficiency.  Bank of America vs. Mitchell, 2012 Westlaw 1177866 Cal.App.  However the lender may circumvent the Simon and Bank of America vs. Mitchell results by assigning the junior trust deed prior to foreclosing on the senior trust deed.  National Enterprises, Inc. v. Woods, 94 Cal.App.4th 1217, 115 Cal.Rptr.2d 37 (2001).
The last statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580e. Cal. Civ. Proc. § 580e only became effective July 15th, 2011.  The provision expands anti-deficiency protection to all mortgages or deeds of trust if all lenders agree to a short sale.  A short sale occurs when the lender allows homeowners to sell their property for less than the amount owed to the lender. Although the lender receives less than the full value of the loan in a short sale, the lender avoids the costs of both the foreclosure and resulting expenses of a property which would end up with the lender. All lenders still have to agree to a short sale process. The law also makes clear that the protections do not apply to commercial loans with multiple security which includes a security interest in residential property.
As discussed earlier consulting with bankruptcy counsel early on may allow a distressed borrower to explore the greatest number of available options.  Bankruptcy may be used not only to avert the negative consequences of a deficiency judgment but a Chapter 13 may sometimes be also be used proactively to get caught up on defaulted payments or to avoid/ strip a wholly unsecured junior lien from the property altogether.  Please feel free to contact my office for assistance. 

So you are a beneficiary of a recovable living trust.   You need to file bankruptcy.   Can you?   Well, it depends.   As long as you are not the settlor and the settlor lives through your bankruptcy, your beneficiary interest is contingent, meaning it doesn’t come into your bankruptcy as property of the estate.   That’s because if the settlor is still alive, that person can always amend the terms of the trust and exclude you as a beneficiary.
Imagine if you filed a chapter 7 bankruptcy, which typically lasts between 4-6 months.   During the course the chapter 7 trustee wanted to pull your contingent interest as a beneficiary into the bankruptcy estate.  Well, the settlor would more than likely just change the terms of the trust and write you out immediately as a beneficiary.  The chapter 7 trustee would be out of luck.   The settlor did not engage in fraud in writing you out of the trust; there is nothing improper in doing so.   However if the settlor was deceased or became deceased during the course of your bankruptcy, the beneficiary interest is no longer contingent and might become part of the bankruptcy estate where applicable.