Tag Archives: Finances

What Really Happens When You File for Bankruptcy

What Really Happens When You File for Bankruptcy

Bankruptcy is a last resort for people and businesses, including Gawker Media, the company that owns this site. Many companies, like United Airlines and General Motors, file for bankruptcy and continue business as usual. Individuals file for bankruptcy and often emerge in one piece, too. There’s a lot of confusion and misconception about bankruptcy, so let’s talk about how it affects your finances.

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The Differences Between Chapter 7, 13, and 11

In general, people file for bankruptcy when there’s no way in hell they can meet their debt obligations. Popular assumption is that those people are bad with money and take out too much credit card debt. Sure, that happens, but often, people and companies file bankruptcy after a major financial blow. It might be a lawsuit debacle. It might be digital obsolescence. It might be an unexpected illness.

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A lot of people think bankruptcy wipes out any and all debt obligations, but that’s not the case. You still have to pay up, and how you’ll pay up depends on what kind of bankruptcy you file: Chapter 7, Chapter 13, or Chapter 11. There are other types of specific bankruptcies, too (Chapter 12 is for farmers and fishermen, for example), but these three are the most common.

With Chapter 7, you may have to liquidate certain assets (like a car or a second home) to pay off at least some of the debt. Most of your assets are probably exempt, but it depends on your state, your financial situation, and whether or not that asset is essential. You have to meet certain eligibility requirements to file, and income is perhaps the most important one. As legal site Nolo explains, there’s a whole set of criteria to determine your income eligibility, but generally, you have to have little to no disposable income.

With Chapter 13, you get a plan to pay off your debts within the next three to five years, but you get to keep your assets. After it’s all said and done, some of those debts will likely be discharged. You have to qualify, though, and that means your secured debts can’t be more than $1,149,525 and your unsecured debts cannot be more than $383,175. Secured debt is debt that’s backed by collateral, like your house or car.

Chapter 11 bankruptcy works kind of like Chapter 13, but it’s reserved for businesses, and basically means a reorganization or restructuring for the company. Businesses can file for Chapter 7 bankruptcy, too, but again, that means a liquidation of assets, so Chapter 11 is usually a more attractive option. Companies get to keep their stuff and keep their creditors at bay while they continue their operations, but they have to come up with a plan to pay off at least some of their debt, or get it forgiven.

What Happens When You File

When you file for bankruptcy, you get an “automatic stay.” Basically, this puts a block on your debt to keep creditors from collecting. While the stay is in place, they can’t garnish your wages, deduct money from your bank account, or go after any secured assets.

Ironically, bankruptcy isn’t free. The filing fee alone is a few hundred bucks for Chapter 7 and 13, and nearly $2,000 for Chapter 11. And then there are the attorney fees. You can file without a lawyer, but it’s not recommended since bankruptcy laws can be tough to navigate. Upright Law estimates the fees for Chapter 7 are $1,000-$2,000, and Chapter 13 are $2,200-5,000. Chapter 11 costs a lot more. Over at Forbes, attorney Robert Bovarnick explains:

In my experience, attorney’s fees run about 4% of annual revenue. If your company has $2,000,000 in revenue, expect to pay between $75,000 and $100,000 to your bankruptcy lawyer–and there may be expenses for accountants and other professionals on top of that.

You’ll also have to take a class or two. The government requires individuals to take credit counseling 180 days before you file, and you also have to take a debtor education course if you want your debts discharged.

A couple of weeks after filing, you’ll have to attend a “creditors meeting,” which is basically what it sounds like: a court meeting between you, your bankruptcy trustee, and any creditors who want to attend. They’ll all ask you questions about your financial situation and decision to file bankruptcy.

Your Assets Get Liquidated With Chapter 7

Nolo says that in most cases, Chapter 7 debtors don’t have to liquidate their property (unless it’s collateral) because it’s usually exempt or it’s just not worth it. They explain:

If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property — which means that you get to keep it, even though it is nonexempt…Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt…

After the creditors meeting, your trustee will figure out whether or not to liquidate your stuff. If it does get liquidated, that means you’ll have to either surrender it or fork over its equivalent cash value to pay back your debt.

You Get a Payment Plan With Chapter 13

With Chapter 13, you get a plan to pay off your debts, and some of them have to be paid in full. These debts are “priority debts,” and they include alimony, child support, tax obligations, and wages you owe to employees.

Your plan is based on how much you owe and what your income looks like, and it will include how much you have to pay and when you have to pay it.

The “Best Interests Test” for Chapter 11

After filing for Chapter 11, the company has to come up with a reorganization plan for their business and finances. While they can continue operating as normal, they do have to run major financial decisions, like breaking a lease or shutting down operations, by the bankruptcy court. Creditors and shareholders can offer their input on these decisions, too. This plan is basically an agreement between the debtor and creditors about how the company will pay its future debts.

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The plan also has to pass a “best interests” test. This test ensures creditors will get as much money under the Chapter 11 as they would if the debtor filed for a Chapter 7 liquidation.

Filing usually takes a couple of months to wrap up, but it takes considerably longer for the actual bankruptcy to come to a close. According to Credit.com, Chapter 7 bankruptcy is generally pretty quick and closes in a few months. This makes sense, since Chapter 7 liquidates your stuff to pay off debts quickly. Chapter 13, on the other hand, can last up to five years. According to Nolo, some Chapter 11 cases can wrap up in a few months, but six months to two years is a more common time frame.

What Happens to Your Credit

Your credit score will plummet with a bankruptcy. The higher your score, the more you’ll fall. FICO estimates someone with a score in the mid 700s might see a drop by over 100 points. Of course, a low score can make your life difficult in many ways.

In general, Chapter 7 and 11 bankruptcies remain on your credit report for ten years, and Chapter 13 stays on for seven.

After bankruptcy is all said and done, most debts are discharged, but not all of them. Student loans aren’t typically dischargeable in bankruptcy, for example. Here are a few other non-dischargeable debts, according to Sutton Law:

  • Tax debts
  • Alimony and child support
  • Divorce-related debts, including property settlement debts.
  • Debts for some fines or penalties.
  • Debts for personal injury or death caused by drunk driving

In some cases, student loans are dischargeable after a bankruptcy, but you have to pass a federal test for hardship, and the Department of Education says it’s rare.

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Bankruptcy is usually a desperate remedy to a helpless situation. Knowing how it works and what to expect can help you navigate some of the misconceptions and figure out what the process actually entails.

Photo: Kaspars Grinvalds (Shutterstock)

What Zombie Debt Is and How It Can Come Back to Haunt You

What Zombie Debt Is and How It Can Come Back to Haunt You

On Last Week Tonight, John Oliver bought $15 million in outstanding medical debt just to prove how easy it is to start a debt buying company. It was debt that regular people owed, presumably from surgeries, hospital stays, medical procedures and so on. Instead of buying the debt to turn a profit, Oliver forgave it. All of it. The segment outlined the many flaws of the debt and credit industry, but specifically the concept of “zombie debt,” or old, forgotten debt that somehow resurfaces.

As legal site Nolo explains, zombie debt is debt that “is very old or no longer owed.” It’s debt that comes back to life when a collection agency buys it for cheap. It’s not the same as maxing out a credit card and being unable to pay or being flooded with bills you can’t haggle down. Zombie debt is often invalid, and collectors use intimidating, sneaky tactics to get people to pay.

How Zombie Debt Works

Debt collectors make money when they buy old debts incredibly cheap and get people to pay a portion of the original amount that’s bigger than what they paid themselves. Theoretically, that doesn’t sound so bad, right? Collectors just help companies reclaim lost funds, and, after all, we should all repay our debts. Fair enough.

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In practice, though, debt collecting is a very shady business, and zombie debt exemplifies this. The Federal Trade Commission (FTC) lists some common types of zombie debt:

  • debts you already settled with a company or other debt collector
  • debts that were discharged in bankruptcy
  • time-barred debts you may have forgotten or overlooked that are past the statute of limitations
  • debts that no longer show up on your credit report, generally after seven years
  • debts you never owed, like debts resulting from identity theft

It’s easy to say “If you have past debt, you should pay it.” Zombie debts don’t work this neatly. As the FTC points out, they’re often the result of identity theft and they can even be debts you’ve already settled.

How Debt Collectors Get Around Time-Barred Debts

The FTC warns that you can restart the clock on the debt’s statute of limitations if you make (or just promise to make) payments. This is important because it’s how debt collectors turn a profit.

“Statute of limitations” means debt collectors can sue you for a limited amount of time to collect your past due debt. After that time, those unpaid debts are “time-barred,” and a debt collector can’t sue for time-barred debts. This time frame—the statute of limitations—varies depending on your state. Here are the statutes of limitations for all 50 states.

When you restart the clock, collectors can sue you, and many of them do. When consumers ignore these lawsuits, which happens often, they have to pay up, which can lead to wage garnishment.

However, don’t get “statute of limitations” mixed up with the time limit for negative items to stay on your credit report. Most unpaid debt falls off your credit report after seven years from the date it becomes delinquent, no matter how many times that debt is bought or sold. That’s separate from the statute of limitations.

How to Deal With Zombie Debt

Sadly, not all of us will be lucky enough to have a cable news show buy and forgive our zombie debt. We’ve told you how to deal with debt collectors before, and the cautionary rules are generally the same for dealing with zombie debt.

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As you can see in the Last Week Tonight segment (and as you may have experienced yourself), debt collectors can be nasty. They use all sorts of tactics (and in some cases, intimidation and outright lying) to intimidate you into paying, from calling you nonstop to contacting your friends and family members.

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Thanks to the Fair Debt Collection Practices Act (FDCPA), debt collectors are not allowed to call during certain hours, use foul language, or make threats, though. So if you’re dealing with an agency breaking the rules, you can report them to the FTC. Also, abusive or threatening language are also red flags, so make sure you don’t have a scam on your hands, and here are a few questions you can ask to expose a fake debt collector. The FTC lays out your rights in dealing with debt collectors.

Assuming the agency is legit, your next order of business is to tackle them head on and make sure the debt is valid. Check out your credit report and see if the debt is listed. If not, the zombie debt may be a result of identity theft, and you can find sample letters to help dispute the debt at identitytheft.gov.

From there, ask for a “Validation Notice.” Consumer Reports explains how this works:

Even if the caller gives plausible-sounding answers, request a “validation notice” to verify the debt. The notice, which must be sent within five days of initial contact, must include the amount of the debt, the name of the creditor, and a description of your rights under the federal Fair Debt Collection Practices.

The Consumer Financial Protection Bureau offers sample request letters, too. To avoid restarting the statute of limitations, don’t even discuss the debt until you receive that notice.

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If you do indeed owe the money and believe you need to pay, dealing with collectors can still be tricky. We’ve written a guide to help you navigate the process, though.

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In most cases, dealing with zombie debt is easier said than done. A quirky television host might come to your rescue, but don’t count on it. At the very least, you should familiarize yourself with your credit report, know the statute of limitations on any past debts, and understand your rights.

Photo by Ryan Jorgensen – Jorgo

Beware the “Productivity Spending” Trap

Beware the “Productivity Spending” Trap

It feels good to get stuff done, but sometimes we trick ourselves into thinking we’re accomplishing tasks that aren’t actually very important—like buying stuff we don’t really need.

Personal finance blog Brooklyn Bread explains:

If you can put a purchase off and it is not saving you money to buy it now, then the smart thing is to delay. But my busy-infected neurons are telling me that I am accomplishing something by incurring the cost now…Like checking email 100 times a day, hitting click on a purchase is an easy way to feel like we are doing something that we need to do. If I really wanted to be productive in that small free moment, I should have planned out dinner for the next two nights. That actually would have been productive, and saved money by ensuring I did not order out. I am trying to be a lot more aware of those purchases that my brain disguises as “getting stuff done.”

This post hit home for me. I’ve been spending a crazy amount of cash on Amazon lately, ever since I moved into a new place. Adding a few house-related items to my cart here and there somehow made me feel like I was getting stuff done. In a way, marking these items off my shopping list gave me a productivity high. The problem is, I was wasting a lot of time consuming, plus, the cost of this “high” can add up.

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It’s not to say you should never buy things you want or need. However, it’s easy to convince yourself shopping is productive, and that can be a dangerous trap for your finances. To read more about this, head to Brooklyn Bread’s full post at the link below.

The Productivity Spending Trap | Brooklyn Bread via Rockstar Finance

Photo by Robbert Noordzij

The Best Metro Areas in the U.S. for Recent College Grads

The Best Metro Areas in the U.S. for Recent College Grads

Where you live can have a big impact on your finances. This is especially true for recent college grads, who are presumably looking for work and paying for new living expenses. Trulia teamed up with LinkedIn to rank the best metro areas in the U.S. for recent college graduates.

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They released their “Graduate Opportunity Index,” which includes info from Trulia’s housing market data and job listing information from LinkedIn. Based on this data, they determined three criteria in their rankings:

(1) the LinkedIn New Grad Job Score, which rates metros based on the share of job openings suitable for recent college grads

(2) Trulia’s New Grad Affordability Score, which is the share of rental units considered as affordable to a new grad based on their median salary, and

(3) the share of total population that is between the ages of 22 and 30 with a college degree.

In general, they found that the East Coast offers better incentives than West Coast cities for recent grads. Pittsburgh, for example, came in as the top city, because of affordable housing rentals and job opportunities. Many of the weakest markets for grads were in California: Los Angeles, Sacramento, San Diego, and San Francisco, for example.

You can read their full methodology at the link below, where you’ll also find detail about the median income for grads in these cities.

Go East Young Grad: America’s Most Grad Friendly Markets | Trulia

The Real Reason It Was So Tough To Get On The Indy 500 Grid This Year

The 100th Indianapolis 500 only attracted 33 cars—enough to fill the grid, but not enough to have entries bumped from the grid during qualifying. Despite the milestone year, teams are still very conservative with who they’ll put in a car. Here’s why just making the grid was so hard this time.

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Loyal Customers Pay More for Cable, So Call and Haggle a Better Price

Loyal Customers Pay More for Cable, So Call and Haggle a Better Price

Customer loyalty usually doesn’t pay off. In fact, Consumerist found that loyal cable customers generally pay $10-$20 more a month. It’s worth picking up the phone and asking your cable company for a better deal.

Consumerist has been studying a number of bills from real customers of seven different cable providers. They’ve shared some interesting findings overall, but here’s what they found in terms of customer loyalty:

One recurring theme we noticed: new customers are getting better packages, for less money, than existing customers. When pricing out comparable bundles for the bill guides, we generally saw that new customers were being offered the same or better service for $10-$20 less than our current customer. We even found one ten-year Charter customer, whose bill we did not publish, paying roughly $75 per month more than a brand-new customer, getting similar service, in their neighborhood would.

It’s interesting to see the actual amount customers pay for their loyalty, and Consumerist they only looked at cable bills, chances are, the same rule applies for any service provider that offers new customer incentives.

Although not everyone has a choice of provider, it’s worth calling yours and asking for a lower rate. Check prices online and see if they’re giving new customers a better deal, then ask for the same deal. If you haven’t called your provider to haggle in a while, Consumerist’s findings serve as a good reminder to pick up the phone.

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The 3 Big Things We’ve Learned About Your Cable Bill | Consumerist

Photo by Kai Chan Vong.

Find the Opportunity Cost of Buying a Car With This Buy or Lease Calculator

Find the Opportunity Cost of Buying a Car With This Buy or Lease Calculator

There are a number of factors that go into your decision to buy or lease a car. Opportunity cost is one factor that might get overlooked, though. This calculator from MarketWatch considers the potential return you’d get by leasing and investing instead of buying.

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As MarketWatch explains, the argument against leasing often comes down to “you’ll have nothing to show for your money,” and that argument doesn’t consider the opportunity cost. You could potentially invest the purchase price of the car and earn a return on it instead.

Of course, you can’t predict the market return, and this implies you would actually invest the money instead of just spend it. So there are even more variables to think about. Still, the calculator is unique in that it at least gives you a rough idea what you might earn over time. You enter your details, including the expected return, and the tool tells you at what price point leasing would outweigh buying.

The calculator uses some general assumptions that might vary depending on your situation, but again, it gives you a rough idea that you can weigh against your decision to buy. Check it out at the link below.

Lease or Buy a Car? – Calculator | MarketWatch

Low-Fee Investment Funds Aren’t Just Good for Your Savings, they Perform Better Too

Low-Fee Investment Funds Aren't Just Good for Your Savings, they Perform Better Too

We’re fans of easy, “set and forget” investing. And that means investing in funds with low fees that don’t eat into your returns. And a recent study from Morningstar found that funds with low fees are generally more successful.

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We’ve told you all about index funds and how they make investing easy and less scary. Another reason to love them? They’re usually cheap. However, some investors argue that their low fees, or expense ratios, come at a price: you get lower returns over time. But Morningstar’s new study found that cheap funds actually perform better than more expensive, actively managed funds. It was enough for them to declare that “fund fees are a strong and dependable predictor of future success.”

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To gauge a fund’s success, they looked at historical data and how much the fund earned over time. Using that number and several other performance factors, they came up with a success ratio to measure how well the fund did over time and what percentage of those funds survived and outperformed similar investments. Here’s what they found overall:

We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds. Strikingly, our finding held across virtually every asset class and time period we examined, which clearly indicates that investors should keep cost in mind no matter what type of fund they are considering.

In one example, the five-year average return for U.S. Equity funds with an expense ratio of 0.65% was almost 11 percent. Similar funds with a 2.2% expense ratio only yielded 8.8 percent.

Of course, you could make the correlation-causation argument here. Just because a fund is cheaper doesn’t necessarily mean that’s why it’s performing better. However, there’s an important relationship between performance and cost. And Forbes contributor John Wasik breaks it down:

Why are cheaper funds more likely to succeed? Managers aren’t running up costs trying to (unsuccessfully) time the market in many cases. Their fees aren’t devouring total returns. That’s why I invest in them in my portfolios, including an array of Vanguard funds.

It’s just another reason to go with low-cost fees in your portfolio, rather than actively managed ones. Over time, they earn a solid, steady return. For more detail, check out the press release below, and you can download the study from there.

Study by Morningstar’s Russel Kinnel Shows Fund Fees are Proven Predictors of Future Success | Morningstar

Photo by Pictures of Money.

The Best Time to Get Married, Depending On Your Taxes

The Best Time to Get Married, Depending On Your Taxes

You’d have to be a very practical person to schedule your wedding around your taxes, but most people at least think about the money benefits of marriage before they tie the knot. And your timing can indeed affect how much you pay the IRS. If you want to choose a date that’ll save—or make—you a little cash, here’s what you should know.

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Calculate Whether You’ll Get a Bonus or Penalty

Depending on how much you earn, you and your spouse will either get a marriage bonus or a marriage penalty when you tie the knot.

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Most couples get a bonus, which means they pay less in taxes by combining their incomes. However, some couples do get a penalty, meaning their combined incomes push their combined household into a higher tax bracket. This usually happens when both partners earn a similarly high or low income. Here’s how one tax analyst explained it over at U.S. News and World Report:

While Congress extended relief from the marriage penalty in the 10 and 15 percent tax brackets, those in higher tax brackets could still pay more. That means they could pay more than they would if they were single, earning the same amount. “The more equal the two incomes are, the greater chance of a marriage penalty,” explains Luscombe. Two incomes that would be taxed at 15 percent separately might together be taxed at 28 percent, for example.

We’ve written about taxes and marriage in detail, but when it comes to picking the best time to get married, you just need to know whether you’ll get a bonus or a penalty when you wed. Thankfully, the New York Times designed a handy bonus or penalty calculator that does the math for you.

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The IRS Considers You Married for the Entire Tax Year

When you do your taxes for the first time as a married person, you might be surprised to know that even if you got married in December, the IRS considers you married for the entire year. (The same goes for getting divorced. If you divorce on December 31, you’re divorced for the entire tax year in the eyes of the IRS.) In other words, your filing status for the entire tax year depends on your marital status as of December 31st of that year.

This rule catches many marriage penalty couples off guard because they end up owing more than they realize. Forbes explains how this happens:

“The biggest challenge to a lot of couples is they end up owing taxes because they were under-withheld [during the portion of the year they were single],” Poulos says. This would especially be the case for couples who get bumped into a higher tax bracket as a result of their joint income…Ultimately, they may end up paying more in taxes to make up for what they didn’t pay while they were in their lower, single-person tax bracket.

On the other hand, if you get a bonus, this rule works in your favor. You get a bonus for the entire year, even if you married July, October, December—whenever.

How to Choose a Date Based on Whether You’ll Get a Penalty or a Bonus

If you fall under the marriage penalty umbrella, timing your wedding toward the beginning of the year could help you save money on taxes. For example, if your wedding is in October 2016, and you’re pushed into a higher bracket, you’ll pay more starting in the year 2016. If you wait a couple of months and marry in January, though, your new, higher tax bracket wouldn’t take effect until 2017, saving you an entire year of paying more in taxes.

Obviously, there’s a lot more that goes into that decision, even financially: the cost of the venue, flight prices for out of town guests. Plus, there are specific tax benefits you get when you marry and file jointly, even if you get the penalty. TaxAct details a handful of those advantages here. For example:

If you own a home that has gone up in value, as a single person you may qualify to exclude up to $250,000 in gain from your income.

As a married person, you can exclude up to $500,000 from income. To qualify for this exclusion, you generally have to own and live in the house for two of the last five years or meet an exception such as a job transfer.

Postponing your date means you’ll miss out on those benefits for the year, too.

On the flip side, if you’re getting a bonus, you can marry early to take full advantage of it. For example, you could move your January 2017 wedding to December 2016 so you can squeeze in an extra year of tax savings and benefits. Of course, that also means you’ll be in wedding mode around the holidays, which sounds like a nightmare.

Change Your Withholding Before Wedding Day

No matter when you get married, you should at least adjust your withholding to prepare for the change in status.

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If you get a penalty for the year, adjusting your withholding now ensures you don’t get a huge, surprise tax bill in April. If you get a bonus, adjusting now ensures you don’t overpay your taxes during the year.

Start with this tax withholding calculator, and enter in your soon-to-be filing status. From there, ask your employer if you can update your W-4, then you’ll add or remove certain allowances. The more allowances you claim, the less tax you’ll have withheld. So if you’re getting a penalty, you’ll want to remove certain allowances. This means you’ll pay more in taxes during the year, which is ideal if you want to avoid a huge tax bill next April.

Most of us aren’t going to plan a momentous, presumably once-in-a-lifetime event around our taxes. Still, it’s good to know how your wedding date will affect your finances, beyond the money you spend on the event itself. Especially if you’re getting a penalty, it helps to be prepared for all the changes.

Illustration by Nick Criscuolo.

Formula One Might Replace Ferrari’s Home Grand Prix With New Race In Las Vegas

“I don’t think we have to have an Italian Grand Prix,” misguided elf-king of Formula One and infinitely wrong man Bernie Ecclestone told The Daily Mail. Tifosi, it’s time to get out those pitch forks and torches. Monza—historic wonderland and Ferrari’s home race Monza—could be replaced by Las Vegas.

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