Bankruptcy of Dentists
Dentists may be forced into financial difficulty because of heavy payments on equipment and practice loans or delinquent taxes.
If there is not enough income to cover the expenses of the office and support the dentist, there are only 3 choices:
1. Continue normally. The dentist who chooses to continue a financially imperfect business will either incur more debt each month or use personal funds to keep the office open. This cannot continue indefinitely; therefore, a decision should be made. This decision is both a financial decision and a personal decision and it should be made as soon as it becomes evident that the problems are long-term.
The financial portion of the decision requires the dentist to weigh the expense and the chance of increasing income against the consequences of closing the office. Increasing monthly income normally involves making changes that reduce overhead, advertising or moving. Closing the office means forfeiting the intangible assets that the dentist has acquired, such as the stability and continuity of the practice, the patient inventory and, of course, the good will that the office has created. Deciding to continue normally is the easiest choice but often it is not the wisest.
The danger is that the decision is often more personal than financial. This is a problem because the personal part of the decision tends to be less financially reasonable than the financial reality. The history and commitment of the dentist to the office and the patients will often obscure a wise financial decision. And a wise financial decision early on provides the best chance of securing both the office and the continuing career of the dentist.
The dentist who is facing financial deficits needs a plan. Just hoping for the best and using savings or exempt IRA funds and personal credit cards to shore up a business is not a wise decision because 27% credit card debt, depletion of personal savings and especially exempt funds (like an IRA) have no place on a gaming table and that is exactly what is happening.
2. Workout. If the bank and other creditors are amenable to a workout, then this is often the best alternative. However, a workout requires the agreement of the creditor (the bank) and although banks may agree to extend loans to lower monthly payments, they rarely agree to reduce debt. Lenders often agree to things that will keep them in control and keep them out bankruptcy court. Thus, the wisdom of a workout lies in the balance between how much debt is owed, the actual value of the collateral and how easy it will be in the long-run to pay the debt and bring the practice current and sufficiently profitable.
3. Bankruptcy. Bankruptcy should be avoided if possible because it is expensive and stressful. However, sometimes bankruptcy can’t be avoided because eventually banks and landlords file lawsuits and seize bank accounts and send sheriffs to sell furniture and shut down dental practices. And in any state but Texas and Florida they can take the dentist’s house to collect. Only federal bankruptcy law can stop them.
Like dental health, one should start early before the pain begins. Time and early planning are essential. It is much like the school nurse who was discussing dental flossing with a young student. “Well no, you don’t have to floss your teeth if you don’t want to. Just floss the ones you want to keep.” Start early when you see signs such as delinquent employment taxes, extensions of loans, late payments, low balances at the end of the month, bank charges for bounced checks, refinancing and rent concessions. Take stock. Where are you realistically?
There are three bankruptcy remedies:
Chapter 11. A Chapter 11 is a “reorganization” type bankruptcy. It was written into law for the purpose of saving businesses. When a dentist files a Chapter 11, the business continues normally but all lawsuits and debt collections stop and everybody goes to the bankruptcy court to figure out what is best for all involved. Chapter 11 can force a fair workout that keeps the dentist in business. It buys the dentist time and provides an opportunity to make changes in the practice and reduce overhead. The dentist files a plan to reorganize the practice and that plan may include the reduction of debt, changes in interest rates and the reduction of monthly payments.
Of course, banks never voluntarily agree to reduce what is owed to them nor do they agree to different interest rates or longer payouts on less debt. But a bankruptcy judge has the power to keep the dentist in business by placing the dentist’s plan of reorganization into effect in spite of what the banks and the other creditors (including the IRS) want to do. That is the reason why some dentists file Chapter 11’s.
Chapter 13. Chapter 13 is a reorganization bankruptcy for individuals. It is possible for some dentists to file Chapter 13’s to stop lawsuits and seizures, but most often dentists operate their business through entities like corporations and LLC’s and only individuals can file Chapter 13’s. However, the alignment of the creditors and debts may permit a Chapter 13. If so, it may be the best route because it is far less expensive.
Chapter 7. A Chapter 7 is not a reorganization type bankruptcy; it is a liquidation type bankruptcy which means that a Chapter 7 trustee takes and sells all of your unencumbered non-exempt property. So, a Chapter 7 is a trade. The debtor in a Chapter 7 trades his non-exempt unencumbered property for a discharge in debt. Chapter 7 is normally used to close a business and/or to discharge debt owed by the individual (the guarantor).
Under certain circumstances, however, an effective reorganization can occur through the use of a Chapter 7. If so, then Chapter 7 is by far the best choice because it is quick and much less expensive than a Chapter 11.
Charles Chesnutt