Bankruptcy of Dentist Offices

Here we assume that the dentist is operating his or her own office and has encountered significant financial problems.

The private dentist normally has two avenues. The first is to simply leave the office and get a job elsewhere and the second is to keep the practice but reorganize it in a Chapter 11.

Leaving the office. If the dentist chooses to leave the office, the first consideration is to make sure of compliance with the Board of Dental Examiners. For a simple move, compliance consists primarily of timely patient notification. The dentist normally encounters issues related to the transfer of existing business to a new employer.

The second consideration is what to do with the existing debt and the equipment that is in the office and collateral for dental loans. Under normal circumstances the collateral will be surrendered to the lender, the office closed and the debt discharged. Debt owed by the dentist should be discharged in bankruptcy without a significant tax consequence because the discharge of the debt in a bankruptcy is not considered income for tax purposes. However, there may be tax consequences related to a reduction in tax basis when a dental office is closed. This must be anticipated and addressed prior to filing the bankruptcy.

The goal for the dentist who leaves an office or a practice is a smooth transition to a new position without any lingering debt or taxes. To accomplish this, the move and the bankruptcy must be planned in advance so that there are no surprises for anyone, including the creditors.

Reorganizing the Office. The dentist often has the option of reorganizing the office rather than leaving it and possibly losing a significant patient base.

A dental office may be reorganized through a Chapter 11. In a Chapter 11 the creditors of a dental office may be forced to accept less than what is due to them so that the amount of actual, bottom line, debt is reduced down to a point where it is manageable.

This is a often a viable option for a dentist whose equipment is several years old because the amount of money owed on the equipment is normally significantly more than its value. And its value (not the amount owed) determines the amount of debt that will be reduced.

A dentist may well have a $1 million note secured by equipment that is worth $150,000. In a Chapter 11 the bank with the $1 million note will have a $150,000 secured claim that must be paid in full with interest and a $850,000 unsecured claim that does not have to be fully paid.

The entire procedure must, of course, be structured to where the individual dentist is protected from the bank's lawsuit by a discharge in a separate bankruptcy or a provision in the Chapter 11.

One thing that dentists, doctors, lawyers and CPAs have in common is their exposure to clients and patients. One of the most distasteful (but most effective) things that the professional debtor can do is to take a very hard look at his practice and determine which of his clients or patients should be notified of his bankruptcy. This notice generally ensures that the client or patient never sues the provider for professional negligence.

Charles Chesnutt