Tom Petty used bankruptcy to change the music industry after resolving a dispute over how a label was treating him as an artist and self-producing an album that racked up $500K in debt.

Bankruptcy is a legal way to manage overwhelming debt, whether for individuals, corporations, or even local governments

Chapter 7 is for liquidating personal assets to clear debts, Chapter 13 allows a repayment plan for individuals, and Chapter 11 lets businesses reorganize to stay afloat.

Every year, nearly 500,000 bankruptcies are filed in the US

From personal hardships to major corporate collapses like Enron and Bed Bath & Beyond, filing for bankruptcy isn't a quick fix or a “get-out-of-jail-free” card—it’s a complex, structured process offering debt relief or repayment options.

For some debtors without assets that can be sold or returned, filing for bankruptcy can provide a path toward a clean slate

However, the bankruptcy process does not apply to several types of common debt, including money owed toward child support or alimony payments. Most debtors also do not qualify for relief from student loan payments.

'Do something you really like, and hopefully it pays the rent. As far as I'm concerned, that's success.'

- Musician Tom Petty (1950–2017)

Brush up on your bankruptcy vocab

The technical term for what happens when a court removes a debtor’s obligation to repay money owed is “discharge.” An “automatic stay” is what goes into place once a filing occurs to prevent a debtor from facing lawsuits, evictions, and other negative consequences until the process wraps up.

How 'Nevermind' realigned the music industry

Nirvana's breakout album inspired other major labels to hunt for similarly loud, countercultural bands. That led to a fascinating period in popular music that found defiantly anticommercial indie acts like the Melvins, the Butthole Surfers, and Ween (among many, many others) suddenly offered lucrative contracts.

The history of bankruptcy in the US dates back to the signing of the Constitution

In 1787, this founding document gave Congress the right to establish nationwide bankruptcy laws. Legislators took advantage of that power in 1800 when they passed the Bankruptcy Act of 1800, the first comprehensive bankruptcy law at the federal level.

The most common types of bankruptcy filings are Chapter 7, Chapter 11, and Chapter 13

However, there are actually six types in practice today. These less-common options can be lifelines for foreign businesses operating in the US, local governments, and farms and fisheries.

Some people make too much money to file for Chapter 7 bankruptcy

Chapter 7 is the most popular type of filing for individuals needing relief. However, to be eligible, debtors must pass an income means test. At the most basic level, they must prove that their average monthly income over six months is below their state’s median. But there are exceptions.

A dispute with his label led to Prince changing his name to a symbol

Prince wrote and recorded music at a fever pitch. That kind of prolific output, however, concerned his label, Warner Bros., which believed that too many releases might oversaturate the market. That eventually led to tensions between Prince and the label, with Prince asking for his master recordings, which would give him full control over how his music would be used. Warner Bros. declined, and Prince changed his name to the unpronounceable symbol that he'd used on album covers in the past, believing it would void his record contract. It didn't, but Warner Bros. eventually released him, though he began going by Prince in 2000 and resigned with Warner Bros. in 2014.

Taylor Swift influenced record labels to change the way they write contracts

In addition to being a successful songwriter, Taylor Swift is a change-maker in the music industry. She asserted creative control over her music, re-recording her earlier albums after she lost the rights to them, and sparked a vinyl revolution in a digital age.

What is Chapter 11 bankruptcy?

While there are multiple types of bankruptcies, Chapter 11 is probably the one you've heard about the most. Technically speaking, Chapter 11 bankruptcy involves a reorganization of a business's assets and debts under court supervision. Companies such as Red Lobster, WeWork, and Party City have all filed for Chapter 11 bankruptcy in recent years. Learn more about it here.

Filing for Chapter 7 bankruptcy can be complex

Debtors must know whether their liabilities are secured or unsecured and what type of assets they have. They also need to know what a filing can and can’t help them with.

Congress has the power to enact laws related to bankruptcy, thanks to the US Constitution

It has done just that since 1800. This legislation, which outlines the various types of bankruptcy filings, has evolved over time. The most recent iteration is the Bankruptcy Reform Act of 1978, which introduced Chapter 11 filings in an effort to make the process easier for businesses and individuals.

The Bristol Sessions built a structure for a nascent music industry

Peer presented each artist at the Bristol Sessions with three separate contracts: one for royalties on the record, one for publishing of the composition, and one for management. It was a business model that would become the norm for the nascent recording industry.

Take a bankruptcy self-filing quiz

If a debtor is considering filing for Chapter 7 bankruptcy, it may be tempting to take a do-it-yourself approach to avoid attorney or preparer fees. However, experts caution that this could come back to bite filers. A quiz can help would-be filers explore whether their cases are complex enough to necessitate a lawyer.

Calculate: Do you need to file for bankruptcy?

About 77% of American households had some debt at the end of 2023. However, when debt becomes crushing, it's time to consider a management plan or a bankruptcy filing. This calculator helps explore whether debt is manageable based on inputs like medical debt, payday loans, and gross annual income.

Chapter 7 and Chapter 11 filings can impact common stockholders

Publicly traded companies don’t file for bankruptcy out of nowhere—there are typically warning signs in a stock’s performance, quarterly earnings calls, and US Securities and Exchange Commission filings.

The Beatles sued technology company Apple in 1978 to defend naming rights to their record label, Apple Corps.

Francis Ford Coppola's first musical led him to bankruptcy

The ambitious (and expensive) 1981 movie musical had a budget of $26M, but earned under $1M at the box office. The flop led to a financially difficult period for the renowned director, who declared bankruptcy three times in the decade following the movie's release.

A private equity firm led the leveraged buyout of Toys 'R' Us before the company's bankruptcy

After being acquired by two private equity firms and a real estate company for more than $6B in 2005, Toys 'R' Us filed for bankruptcy in 2017. Many point to the $400M a year the company had to pay to service its debt, as well as increased competition from online retailers like Amazon, for draining its profits and ultimately dragging it under.

Red Lobster lost $11M on endless shrimp promotions—but its real estate holdings were what dragged it to bankruptcy

Golden Gate Capital, a PE firm, bought Red Lobster in 2014 for $2.1B. Golden Gate then sold Red Lobster's real estate, more than 500 storefronts, which generated $1.5B in revenue and helped finance the PE firm's acquisition of the company. Analysts say increased debt, high rent costs, and low equity put Red Lobster in an impossible position, leading to its 2024 bankruptcy filing—although the shrimp bill probably didn't help.

In 1931-32, JP Morgan Jr. paid no income taxes due to his company’s losses

This legally reduced his taxable income under existing laws. Similarly, the Rockefellers leveraged charitable foundations to minimize taxes, allowing them to preserve wealth while directing funds to their preferred causes.

Paul McCartney announced his departure from the Beatles in a 1970 press release, surprising his bandmates.

The Buzzcocks' 1975 self-released EP inspired a DIY ethos for punk

Punk sought to dismantle the self-importance of mainstream rock, favoring simple arrangements, short songs, and raw passion over sophistication or expertise. When the Buzzcocks struggled to find a label to release their debut record, “Spiral Scratch,” they took that do-it-yourself approach and applied it to business by releasing it themselves.

Steve Jobs saved a nearly bankrupt Apple

Apple nearly went bankrupt in 1997, when the tech company had only three months of operational cash left. Apple's board ousted cofounder Steve Jobs in 1985, but he was brought back as interim CEO to revive the company when Apple purchased Jobs' company, NeXT.

Credit scores seriously suffer when individuals file for bankruptcy, and there’s no easy fix

Those who file for Chapter 7 must wait 10 years before the bankruptcy is removed from their credit report. For Chapter 13, the wait time is seven years.

JP Morgan Jr. once angered the nation with his zero-dollar tax bill

In the aftermath of the Great Depression, Congress learned that Morgan and his banking partners had avoided paying any federal income tax in 1931 and 1932. By claiming their losses in the stock market, they seemingly erased what they owed.

Taylor Swift outsmarted her label by re-recording her albums

After Taylor Swift lost the rights to her songs, she lost control over what she could and couldn't do with them. Aware of her fan base, she re-recorded them, encouraged fans to listen only to her new versions, and improved the production quality, creating new hits out of existing songs.

Why Metallica sued Napster—and enraged music fans

When Lars Ulrich, the drummer for metal legends Metallica, began his press campaign against Napster, an early filesharing software, he said he was fighting for artists. Listeners weren't convinced, especially because data suggested that filesharing services helped record sales rather than hinder them. This history of the ordeal contextualizes more modern problems in the music business, especially considering streaming services like Spotify were initially seen as a solution to illegal filesharing.

Clive Davis was responsible for signing influential artists and superstars, including Patti Smith, Bruce Springsteen, and Alicia Keys.

Twain was a notoriously bad investor

After becoming a famous writer, Twain invested in railroad stocks, a magnetic telegraph, and a printing press that weighed four tons. Eventually, he founded his own publishing company, which ultimately led to his bankruptcy. “He is, in business,” one lawyer said, “just a big overgrown boy.”

Nirvana's 'Nevermind' brought punk to the mainstream

The Seattle band’s second record, its first on a major label, went to number one four months after it was released in 1991. At one point, it was selling 300,000 copies a week. The band’s lead singer, Kurt Cobain, believed in punk’s countercultural aims and felt deeply conflicted about success.

Learn about the Beatles song 'Taxman,' which was inspired by Britain's tax structure

In the US, many people think of the IRS as the "taxman"—but the Beatles song is actually about the tax structure in the UK at the time. George Harrison wrote the song when he realized that even though the Beatles had started earning money, "we were actually giving most of it away in taxes," as he wrote in his autobiography.

In 2004, Prince paid tribute to George Harrison with a surreal solo

The 2004 Rock and Roll Hall of Fame ceremony paid tribute to the recently deceased Beatle with a rendition of one of his most famous songs by Tom Petty, Jeff Lynne, Steve Winwood, and George Harrison's son, Dhani. Several minutes into the performance, Prince suddenly appeared center stage for a virtuosic solo. He ended it by tossing his guitar into the crowd. Tom Petty's drummer would later say, "Everybody wonders where that guitar went, and I gotta tell you, I was on the stage, and I wonder where it went, too."

Why is Bob Dylan on Patreon?

The singer's notorious for his inscrutability, but his venture into the content subscription website might be one of his stranger choices, especially given the posted content that resembles AI-generated material. Pitchfork's Nina Corcoran surveys the site and tries to make sense.

How to get out of debt

This article provides a few helpful tips for getting out of debt, such as learning more about the debt itself and asking for better interest rates. It also explains the popular "debt snowball" and "debt avalanche" methods for getting out of debt. Curious to learn more? Read the full article here.

The Beatles once sued Nike

Nike used The Beatles' "Revolution" in an ad, sparking a $15M lawsuit over the song's use. While The Beatles and Nike ultimately reached an agreement, Nike ushered in the modern practice of using hit songs in advertisements, as opposed to jingles or covers.