Bankruptcy isn’t something to be ashamed of. It helps businesses and people — including the former leader of the free world — escape from debt and move forward. Former President Donald Trump has repeatedly used bankruptcy to help his businesses and himself get ahead. This article discusses Donald Trump’s bankruptcies and how they benefited his companies. It also addresses how personal bankruptcy compares to business bankruptcy and why both are necessary for a healthy economy.
Written by Attorney Paige Hooper.
Updated November 30, 2021
Former President Donald Trump has repeatedly used bankruptcy to help his businesses and himself get ahead. Trump understands that filing for bankruptcy is nothing to be ashamed of. Instead, in some cases, bankruptcy is simply the best decision that a company can make to move forward financially. This logic doesn’t only apply to businesses, though. It’s also true for individuals and couples who file personal bankruptcy to address financial hardships and improve their financial situations.
This article discusses former President Donald Trump’s bankruptcies and how they benefited his companies. It also addresses how personal bankruptcy compares to business bankruptcy and why both are necessary for a healthy economy.
What Is Bankruptcy?
Bankruptcy is a legal resource that helps people, businesses, and even cities and towns get relief from debt. This process is governed by federal laws. The different chapters of the U.S. Bankruptcy Code cover different types of bankruptcies, each designed to help with a different situation or goal.
Chapter 7, for example, helps people wipe out large amounts of unsecured debt, such as medical bills and credit card debt. For people who’ve fallen behind on secured debt payments, such as their mortgage or car note, Chapter 13 can help them avoid a foreclosure or repossession by catching up their secured loan payments.
In movies and game shows, “bankrupt” usually means losing everything. In the real world, filing for bankruptcy can mean different things, depending on the type of bankruptcy, but it doesn’t mean losing everything. Most people who file personal bankruptcies are financially better off after their bankruptcies are complete than they were before they filed.
Personal vs. Business Bankruptcy
One major difference between personal and business bankruptcies is motivation — why a person or business might decide to file for bankruptcy. Many people view personal bankruptcy as an option of last resort. They may only consider filing bankruptcy after first trying to tackle their debts in other ways. For businesses, though, filing bankruptcy is often seen as a proactive, strategic way to improve the company’s financial position. Bankruptcy can be a smart business decision even when a company isn’t on the verge of collapse.
Unlike personal bankruptcies, which mostly only affect the people who file them, a business bankruptcy usually affects all the people who are part of the business. Employees, for example, could lose their jobs. Management might be removed or replaced. Investors could lose some or all their stakes in the business.
Most business bankruptcies are filed under Chapter 11 of the Bankruptcy Code, while most personal cases are filed under Chapter 7 or Chapter 13. In a Chapter 11 case, the business can continue to operate while it negotiates with its creditors to reorganize its finances. The goal is to reach a deal that puts the company in a stronger financial position. The rules for Chapter 11 reorganization cases are seemingly more flexible as creditors play a big part in negotiating the business’s reorganization plan. In Chapter 13 case, on the other hand, creditors don’t have much say in creating the repayment plan.
The Six Trump Company Bankruptcies
Donald Trump has made huge sums of money in his lifetime, but he’s also lost astronomical amounts. Between 1990 and 1994, for instance, Trump’s businesses lost more than $804.4 million, even while similar companies saw profits. During that time, and throughout his career, Trump has strategically used bankruptcy to keep himself and his businesses afloat.
Trump-owned businesses have filed for bankruptcy six times so far. Each time, the bankruptcies freed Trump from debt and allowed him to start his next venture. He famously went on to occupy one of the world’s most powerful positions: President of the United States.
Trump Taj Mahal
The Trump Taj Mahal Casino Resort in Atlantic City, New Jersey, was the world’s largest casino when it opened in April 1990. The Taj cost roughly $1.2 billion to build. Trump financed most of the building costs by selling junk bonds, a common financing method at the time.
A bond is essentially an IOU from a company. A lender buys the bond, and then the company pays the lender back, with interest. “Junk bonds” are bonds sold by companies that don’t have much equity or credit history. Because they’re higher risk, junk bonds pay a higher interest rate to the lenders who buy them.
Trump was paying 14% on the junk bonds he sold to build the Taj — an extremely high interest rate for business debts. This excessive interest caused the casino debt to skyrocket, and Trump couldn’t keep up with the payments. The Taj--then, nearly a billion dollars in debt--filed for Chapter 11 bankruptcy in July 1991. High-interest debt is still one of the main reasons that people file for personal bankruptcy today.
Trump Castle and Trump Plaza Casinos
Before he opened the Taj Mahal, Trump owned two other Atlantic City casino resorts: the Trump Castle Hotel & Casino (later called the Trump Marina Hotel and Casino) and the Trump Plaza Casino. When the Taj Mahal opened, it became a competitor for Trump Castle and Trump Plaza. Income dropped at the older casinos. As a result, both properties filed for Chapter 11 bankruptcy in March 1992, shortly after the Taj Mahal filing.
Trump’s three Atlantic City casinos had many of the same creditors. In some cases, two or all three properties served as collateral for the same loan. (Collateral is something a creditor can take if the borrower defaults on the loan.) Even though each property had a separate bankruptcy case, Trump’s negotiations with the creditors generally involved all three casinos at the same time. Trump still refers to these three cases as one combined bankruptcy. This confusion is probably why sources sometimes refer to Trump’s four bankruptcies, instead of six.
Together, the three casinos were tied to around $3.4 billion of debt. Trump was personally responsible for about $900 million of that amount. As part of the Chapter 11 restructuring, Trump’s creditors agreed to lower his interest rates and give him additional time to repay his debts. In exchange, Trump agreed to give up 50% of his ownership in all three casinos to his creditors. He also agreed to sell a significant chunk of his assets and turn the sale proceeds over to the creditors, including:
His Trump Shuttle airline
A 49% share of New York’s Grand Hyatt Hotel
His 281-foot yacht
A 27% share in department-store chain Alexanders, Inc.
Trump also agreed to stick to a personal spending limit — essentially an allowance — to cover his personal expenses. Still, Trump wasn’t exactly roughing it: The “allowance” was $450,000 per month.
Trump Plaza Hotel in Manhattan
At the same time that Trump was struggling financially with casinos in Atlantic City, he was also facing challenges in New York City. His Trump Plaza Hotel on Fifth Avenue was $550 million in debt and behind on its payments. The hotel filed Chapter 11 bankruptcy in November 1992.
As part of the Chapter 11 plan, Trump lost his 49% stake in the hotel. He was still allowed to call himself CEO, but he didn’t have any say in the hotel’s business operations and didn’t get paid. In return, Trump’s creditors agreed to more favorable terms for the hotel’s debts.
Trump Hotels and Casino Resorts
Trump Hotels and Casino Resorts (THCR) was a holding company that Trump created in June 1995. A holding company is a business that owns some or all of another business’s shares and assets. THCR took over ownership of all three of Trump’s Atlantic City casinos, along with most of their debts. In November 2004, THCR filed Chapter 11 bankruptcy to address $1.8 billion worth of debt.
In this Chapter 11 plan, the creditors agreed to forgive about $600 million of THCR’s debts and reduce its interest payments by roughly $102 million per year. In exchange, Trump:
Gave up his CEO title.
Surrendered some of his shares of the company to bondholders, reducing his stake in THCR from 47% to 27%.
Agreed to invest $55 million of his personal funds in the company.
After filing for bankruptcy, the holding company changed its name to Trump Entertainment Resorts. Trump remained chair of the board, but the company’s bondholders selected the other board members.
Trump Entertainment Resorts
The holding company, operating under its new name, filed Chapter 11 bankruptcy again in February 2009. The U.S. economy was in a severe recession at the time, and Trump wasn’t getting along with the new board members. As a result of the bankruptcy, the bondholders forgave around $1.3 billion. In return, Trump’s stake was reduced to 10%, and he had to resign as chair of the board.
Failed Trump Businesses Not Reorganized via Bankruptcy
Donald Trump has never shied away from filing bankruptcy, but he only chose bankruptcy when he believed it was the best option for that business and his overall career. Trump has had other business failures that he didn’t save via bankruptcy, such as:
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Why Are Businesses Allowed To File For Bankruptcy?
Bankruptcy is an important tool for businesses in America’s capitalist economy. The safety net of bankruptcy protections allows entrepreneurs to pursue big dreams without jeopardizing their personal finances. Corporate structure also provides a way for business owners to protect their personal funds. With a corporation, an owner or investor can only lose any money that they’ve put into the business or personally guaranteed.
Business bankruptcy offers an additional layer of protection for the business itself, as well as the investors or owners. A Chapter 11 bankruptcy can help a business survive a bad year, an expensive lawsuit, or a failed experiment. Without bankruptcy, businesses would be less willing to experiment with new product ideas and other potentially risky business concepts.
If businesses couldn’t file for bankruptcy, one failed business could financially ruin an entrepreneur for life. Early in America’s history, a business failure could lead to prison time. The threat of debtor’s prison put a damper on people’s willingness to take big risks with their business ventures. It also made investors less inclined to consider new or risky ideas. Modern bankruptcy laws limit risk for investors, who help to fund new business innovations.
Among America’s historically great entrepreneurs, many have taken advantage of the bankruptcy laws to move forward with pursuing their visions. Some of them went on to build businesses that changed American history. For example:
Henry Ford filed bankruptcy twice before finding success with the Ford Motor Company.
Walt Disney filed bankruptcy after his first film studio failed, a few years before he created Mickey Mouse.
Milton Hershey filed bankruptcy for two failed candy businesses before launching The Hershey Chocolate Company.
Without business bankruptcy, these iconic American brands and products might never have existed.
Why Are Individuals Allowed To File For Bankruptcy?
Like business bankruptcy, personal bankruptcy helps keep the economy running. Personal bankruptcy provides a way for individuals and couples facing financial hardship to move forward. Rather than using all of their income for debt payments, they can buy cars and houses, rebuild their credit, save for retirement, and contribute to a healthy economy.
Deciding to file for personal bankruptcy isn’t usually a calculated financial strategy. But personal bankruptcy can be a smart decision that leads to a better financial future. To think like a CEO and determine whether bankruptcy is a smart choice for you, you’ll want to consider:
How much debt you have and how much interest you’re paying.
How long it will take you to pay off the debt at your current rate.
What you’re getting for your money. For example, are you paying old debts where you’re not going to get anything else for your money?
What else you could use that money for. In other words, what you’re giving up by not filing for bankruptcy.
What other options are available, such as selling something or negotiating a lower rate.
Filing for bankruptcy isn’t wrong, and it’s certainly nothing to be ashamed of. For people and businesses alike, sometimes bankruptcy is just the best financial option available.
People tend to think of filing for bankruptcy as an option of last resort. Business owners, on the other hand, tend to see bankruptcy as a smart move to put their company in a better position. Donald Trump, for example, filed bankruptcy for six businesses that he owned. He remained wealthy and went on to both win the Republican nomination and to win the 2016 presidential election.
Bankruptcy isn’t something to be ashamed of. It’s a useful financial resource and a necessary tool for a productive economy. Bankruptcy helps businesses and people — including the former leader of the free world — escape from debt and move forward.