Aaron Carter Hopes For Fresh Start Following Chapter 7

Just over ten years ago, Aaron Carter was at the top of his game. He had a number of hit singles, including “I Want Candy” and was dating the darling of the Disney set, Hilary Duff. In great demand like his brother, Nick Carter of the Backstreet Boys, Carter appeared on television shows, toured extensively and even had his own action figure. It was an amazing life for a boy not even out of his teens.

Now, at age 25, despite efforts to make a comeback, Carter is broke. He has claimed in court documents that he has assets worth just $8,232.16 – including computer and music equipment and $60 in cash – but owes creditors more than $2 million in liabilities. A big chunk of his liabilities is owed to the Internal Revenue Service: he has an outstanding tax bill totaling $1,368,140.

Carter’s tax bills date back to 2003. In 2009, the IRS slapped Carter with a million dollar lien – the same year he appeared on the ninth season of ABC’s Dancing with the Stars with professional dance partner Karina Smirnoff. Smirnoff said about the tax lien and Carter’s debts at the time, “I don’t see why he can be held responsible. He was a baby when all that… happened.”

In 2003, Carter was just 15 years ago. He was old enough to earn millions and be subject to tax but likely too young to understand his financial responsibilities. That’s what management is for, right?

Carter has a new management team now but his prior management team included Lou Pearlman. Yes, you’ve heard of him. Pearlman created Trans Continental Records and was responsible for creating the boy bands ‘NSYNC and The Backstreet Boys – big brother Nick Carter’s former band and the best-selling boy band of all time. He also dabbled in reality television, “finding” the boy band O-Town on the first season of ABC’s Making The Band (Pearlman would bow out for season two as P. Diddy took over search duties).

Pearlman created and managed a number of short-lived popular bands under his belt including LFO, Take 5 and Innosense, whose original band members included pop princess Britney Spears and Playboy model Mandy Ashford. He also promoted a number of other artists on the label – including Aaron Carter.

Pearlman appeared to be a cash machine. Only he had a bit of a secret: he was playing fast and loose with other people’s money. Nearly every musical act that Pearlman managed or represented has sued him for fraud – including Carter. Carter actually filed suit against Pearlman twice. He filed suit first in 2002, alleging that Pearlman failed to turn over hundreds of thousands of dollars in royalties. Then, just 15, Carter said, “Over in Europe, we sold millions of albums and I didn’t get anything for it.” That suit was settled out of court.

Carter sued again in 2007, asking to be let out of his recording contract since he signed while still a minor. Carter won that suit. He also asked for an accounting of his royalties: that wouldn’t happen as Pearlman, who was awaiting trial at the time of the suit, would eventually plead guilty to conspiracy, money laundering and bank fraud charges and is now in federal prison. Pearlman was alleged to have bilked about 1,000 investors of more than $300 million, as well as an additional $150 million from banks. To secure the initial funding, Pearlman offered fake tax returns to banks and investors for the years 2003 and 2004 allegedly prepared the accounting firm of Cohen & Siegel – a firm that didn’t exist but was made up in order to perpetuate the fraud. So maybe not the greatest financial role model for the young Carter.

And it wasn’t just Pearlman who let Carter down. In December 2003, Carter filed for legal emancipation from his mother and manager, Jane Carter. Carter alleges that his mother took more $100,000 from his bank account, saying: “I worked hard for months — 10, 11 hours a day, not including school and press appearances — and I come home and owe money!” Carter eventually reconciled with his mother, and they both attended Carter’s sister’s funeral last year (brother Nick did not appear, citing his family’s “complicated dynamic“).

All of these legal and personal troubles for Carter bunched at roughly the same time: the year 2003 really stands out. Perhaps not coincidentally, the lien for Carter’s 2003 tax bill alone is just under $1 million.

Ten years later, Carter is still facing those bills. Several efforts to get back into the spotlight, including that stint on Dancing With The Stars, certainly increased his profile but not his bank account. His management team hopes that a Chapter 7 bankruptcy will offer the singer – who is still very young – a fresh start. Chapter 7, which allows most debts to be discharged, is more drastic than Chapter 13, which generally results in a reorganization of debt. Carter likely opted for Chapter 7 bankruptcy because he doesn’t own anything of value – like a house – that he wants to hold onto.

While it can be tricky to get rid of tax debts in a Chapter 7 bankruptcy, it is possible. You can discharge federal income tax debts under a Chapter 7 bankruptcy if the timing is right and there’s no fraud or willful tax evasion. In terms of timing, the tax debts must be old, meaning from a tax return that was due at least three years before bankruptcy and you must have actually filed the return more than two years ago. Additionally, taxes must have been assessed more than 240 days ago.

Unfortunately for Carter, a Chapter 7 bankruptcy does not generally result in a discharge of existing tax liens. Translation: the IRS can’t chase Carter to collect but the tax liens remain until the debt is paid off or until the liens are withdrawn, whichever comes first. Federal tax liens usually remain in place for up to 10 years after assessment (the same time period the IRS has to collect those taxes).

Carter isn’t focusing on the bad, however. He views this as a step forward as he tries to get his life back together. His publicist, Steve Honig, said, about the filing, “This is not a negative thing. It’s actually very positive. It’s him doing what he needs to do to move forward.”

Carter seems to be doing just that, as he’s currently on tour. The single he’s promoting is aptly titled Where Do We Begin?

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Source:http://www.forbes.com