The 10 Biggest Legal Mistakes Physicians Make in Bankruptcy Matters

By Steven B. Ramsdell, Esq.


Executive Summary

The bankruptcy process consists of intertwined procedural and substantive rules that must be carefully observed if one is to maximize the probability of achieving his or her objectives, whether as debtor or as creditor. Although physicians, thanks to their potential for achieving significant wealth, are not disproportionately represented in the bankruptcy process as debtors, for whom the objective is generally to be released from preexisting debt and to obtain a fresh start going forward, it is nevertheless not uncommon that a physician, like any business person, is compelled to seek bankruptcy relief. The routine events that might lead a physician to contemplate bankruptcy include the following:

  • An inability to pay back student loan obligations pursuant to the terms of the notes;
  • The failure, either because of inattention or cash-flow difficulties, to sufficiently remit estimated tax payments to the government, resulting in accumulated income and self-employment taxes, interest, and penalties, beyond the physician’s ready ability to pay;
  • Cash flow in a start-up medical practice that is insufficient to service the debts incurred to finance such start-up through, for example, business loans or credit card borrowing;
  • Downsizing a practice in which the physician is personally liable for future rent on a long-term lease; and
  • Investing in real estate, where the market falls out and the value of the real estate falls below the amount of the encumbering mortgage obligations.


With the potential to generate high incomes and to acquire significant assets and investments comes the potential to incur correspondingly high business and personal expenses and to incur extraordinary amounts of debt. Therefore, where bankruptcy is implicated for the physician, such a case is likely to be more involved than the routine consumer bankruptcy. As a result, it is incumbent on the physician, more so than on an average debtor, to approach bankruptcy with the resolve to become educated as to the rights and obligations that accompany the bankruptcy and to scrupulously observe its requirements.


Additionally, physicians are often in a financial position to extend credit to others. For example, a physician owning a small business complex might sublease various units to tenants. Another might develop real estate and take back a second mortgage for investment income when such real estate is sold. In these contexts over long periods of time, a physician is likely to be confronted with the occasional borrower who defaults on rent or mortgage payments and then files bankruptcy, leaving the physician subject to the creditors’ rights provisions of the Bankruptcy Code.


This section enumerates some of the bankruptcy mistakes that must be avoided by a physician as debtor or creditor in confronting the bankruptcy process. Some of these mistakes can thwart not only the legitimate expectations that the physician sought to vindicate in the bankruptcy process, but can also have catastrophic economic ramifications for the physician.


Mistake 1        Failing to Precisely Disclose Information Required by Bankruptcy Schedules and Forms

Mistake 2        Failing to Carefully Determine the Ability to Exempt Certain Assets

Mistake 3        Assuming Old Tax Debts Will Be Discharged Under Chapter 7 or Chapter 11

Mistake 4        Failing to Consider Chapter 13 As a Method for Resolving Tax Debts

Mistake 5        Violating the Automatic Stay

Mistake 6        Failing to File a Proof of Claim

Mistake 7        Failing to Monitor Senior Mortgage Lenders

Mistake 8        Failing to Observe Deadlines for Filing a Discharge or Dischargeability Complaint

Mistake 9        Failing to Observe Deadlines for Opposing Confirmation of a Plan

Mistake 10      Failing to Treat Bankruptcy As Litigation


The above has been excerpted from the SEAK text, The Biggest Legal Mistakes Physicians Make and How To Avoid Them