Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)
Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them
Executive Summary A debtor’s key to a successful bankruptcy process is, ultimately, honesty. Physicians need to be aware that even some seemingly benign actions can have serious legal consequences and, in some circumstances, be financially devastating.
Mistake 1 Transferring Assets Simply stated, physicians contemplating bankruptcy cannot transfer assets. This includes interests in professional corporations and practice groups, accounts receivable, real estate, and other property. Transferring assets can include mortgaging, placing in trust, and/or selling property at fair market value. Transferring assets can result in the transferee being sued by a trustee, and the transferor being denied a discharge. Certain transfers can be set aside, even if they occur up to a year before the bankruptcy filing.
Action Step Physicians should not transfer any assets if they are contemplating bankruptcy.
Mistake 2 Getting into More Debt The temptation to get into more debt can be great, especially if there has been a cycle of using unsecured credit to pay down other creditors. Continued use of credit cards, once it is apparent that bankruptcy is inevitable, is only an invitation to trouble, higher legal fees, and a possible denial of discharge.
Action Step Physicians should stop using unsecured credit, such as credit cards and credit lines.
Mistake 3 Paying off Certain Creditors Often, physicians in financial distress borrow money from friends, family, and colleagues. The prospect of filing bankruptcy often leads debtors to shy away from having to tell their friends and family. They might even consider paying the debt prior to filing bankruptcy, so as to keep the debt out of the bankruptcy. In bankruptcy, all unsecured creditors are put on an even playing field, but friends and family are considered insiders. The Bankruptcy Code states that any payment to creditors within 90 days of the filing of a bankruptcy petition can be set aside by the trustee as a preferential payment. In other words, the physician debtor cannot “prefer” to pay one creditor over another, when it is presumed that the debtor will end up in bankruptcy. Insiders, however, are treated differently. Any payments to insiders within one year of filing can be set aside as a preferential transfer.
Action Step Physicians should stop paying creditors and start the process of preparing to file.
Mistake 4 Not Reading the Petition and Schedules Before Signing When a physician retains an attorney it does not mean that the physician need not be concerned with the accuracy of the petition itself. While an attorney will prepare the necessary paperwork, it is done based on the information provided by the physician debtor. When the debtor signs the petition, schedules, and the statement of financial affairs, that signature is under penalty of perjury. Debtors cannot merely say that they glanced at the petition and assumed that their attorney accurately set forth every item in the petition. Recently, a court ruled that debtors who maintained that they did not read their petition fully, and relied on their attorney being accurate, were denied a discharge. A good attorney will take steps to make sure that his or her client has had plenty of opportunity to review the petition, make changes, and ensure that it is accurate. Physician debtors should take advantage of those opportunities.
Action Step Physicians should read the petition carefully, and if there are any changes to be made, or if any information is not accurate, inform their attorney immediately.
Mistake 5 Not Retaining Competent Counsel Bankruptcy is a complicated process, and has been made even more so by recent Civil Enforcement Program actions led by the U.S. Trustee’s office in an effort to detect fraud. The bankruptcy paperwork may highlight or trigger issues that can adversely affect a debtor in bankruptcy. A competent and experienced bankruptcy lawyer will be able to determine what issues the physician can expect to arise and who might be affected by those issues, which may include those who are not filing bankruptcy, such as business partners and spouses. The attorney retained should be experienced in bankruptcy matters, not merely someone who is doing the physician debtor a favor.
Action Step Physicians should not represent themselves in a bankruptcy matter; they should retain competent counsel.
Mistake 6 Concealing Personal Property Debtors are required to detail what property they own. While debtors are not (yet) required to itemize every kitchen utensil, they do have to list certain items (e.g., jewelry, automobiles, and stock holdings). Debtors should assume that the trustee already knows what the debtor owns, especially if that personal property was obtained with a credit card. A gold Rolex bought with an American Express card as a personal treat should be listed on the petition. Physicians who have concerns about having to surrender an item of personal property in a bankruptcy should consult with their lawyer. They should not try to hide the property or give it away.
Action Step Physicians should disclose all personal property, and take no steps to conceal it or give it away.
Mistake 7 Reaffirming a Debt Against the Physician’s Interest A debtor can reaffirm a debt in bankruptcy. This means that the debtor may pay the debt, thus taking the debt out of the bankruptcy itself and not subjecting it to a discharge. There are significant legal implications in reaffirming a debt, since it can no longer be discharged in any subsequent bankruptcy proceeding. Many debtors reaffirm secured debts on cars and homes. However, debtors seeking to reaffirm must assess whether they can actually afford the payments associated with reaffirmation. Debtors who already have precarious income and spending issues run the risk of additional financial dilemmas by reaffirming a debt they cannot afford to pay. To avoid this situation, debtors must seriously examine their current income and expenses, and whether their income or expenses are likely to change in such a way that making those payments might prove difficult. A competent attorney can help guide debtors in determining what is in their best interest.
Action Step Physicians should listen to the advice of counsel before reaffirming any debt.
Mistake 8 Obtaining Phony Appraisals and Valuations Attorneys for debtors rarely retain appraisers to place value on their clients’ property, but rather advise the debtors to obtain valuations themselves. This could be something as simple as taking a diamond ring to a jeweler for an appraisal or getting an appraisal on the debtor’s home. Physicians should resist the temptation to get an appraisal that will end up defying credibility. No bankruptcy trustee will believe that a two-carat diamond ring is worth only $1,000, and no bankruptcy trustee will believe that a 2,500 square foot condominium in Boston’s historic Beacon Hill is worth only $100,000. Providing intentionally misleading information will result in a denial of discharge, and likely a referral to the U.S. Trustee and the U.S. Attorney for criminal prosecution.
Action Step Physicians should get accurate appraisals and valuations for real and personal property if required by their counsel.
Mistake 9 Not Communicating with Business Partners Debtors who have equitable interests in business entities, such as practice groups, should inform their partners of their intention to file for bankruptcy. It is not recommended to encourage partners to transfer assets or to engage in any activity that might be considered fraudulent. Partners who are aware of a debt-distressed partner’s intentions will have the ability and time to consult with their own counsel to determine their rights, obligations, and in some cases, options. If a business partner learns of a bankruptcy filing through the mail, and after the filing, the options for all partners may be limited. In addition to creating possible legal complications for nondebtor partners, it will likely result in bad personal feelings and animosity, which are not needed in an already stressful legal process.
Action Step Physicians should consult with counsel and talk to their business partners. A debtor’s filing affects the debtor’s family, and business partners are, for the purposes of bankruptcy, as important as family.
Mistake 10 Not Accepting That It’s Time to File Denial is easy to see in everyday life. Some debtors seek assistance as soon as it is apparent that the debt is not manageable. Others, such as a compulsive gambler who is waiting for the perfect roll of the dice or the perfect hand, will wait and hope. Ultimately, their waiting proves to be futile. By the time they find the motivation to take action, they are in a financially worse situation that, in many cases, presents additional legal concerns and complications. In fact, many debtors who delay filing end up in a position where bankruptcy will not provide a maximum benefit. The time to start dealing with oppressive debt is at the first moment that the debtor realizes that there is a problem in meeting both debt obligations and everyday expenses. This does not mean that debtors need to rush to the bankruptcy court upon realizing this, but certainly a careful, thoughtful, and informed evaluation of all available options should be considered. Doing nothing does not mean that the debt situation is going away.
Action Step Debtors need to take control, face the debt demon, and start the process of getting on with their lives.
Conclusion Bankruptcy is difficult enough without making costly mistakes. All of these action steps should be taken after consultation with counsel. Competent bankruptcy counsel can listen to the unique facts of the debtor’s case and make appropriate recommendations to ensure that the process of bankruptcy is as productive and painless as possible.
Additional Resources
- Bankruptcy: Is It the Right Solution to Your Debt Problems? 2nd ed. (Nolo Press 2004)
- Schollander and Schollander, The Small Business Owner’s Guide to Bankruptcy: Know Your Legal Rights, Recover From Mistakes and Start Over Successfully (Sphinx Publishing 2002)
- Warren and Tyagi, The Two Income Trap: Why Middle Class Mothers and Fathers Are Going Broke (Basic Books 2003)
Written by: William J. McLeod, Esq.
Peer reviewed by: Robert S. Messinger, Esq.