Bankruptcy of Lawyers

Here we assume a Chapter 7. If the lawyer will be better served with a Chapter 11 or a Chapter 13, then the rules for those bankruptcies apply to professionals as they do to other debtors.

But for the lawyer, reorganization under a Chapter 7 is often the most advantageous. The reason for this is that the real value of a professional's buisiness is the person of the professional himself. This is advantageous because the person of the professional cannot be lost to the bankruptcy estate, nor can it be encumbered.

A lawyer can file a Chapter 7 on Friday and be back to work effectively free of debt and with the bankruptcy behind him on the next Monday. Certainly, the physical process of the bankruptcy proceeding remains to be completed, but if properly prepared, that process for the lawyer should consist of one meeting that he must attend about 5 weeks later.

However, much of the value of the lawyer's bankruptcy may lie in receivables and in cases in which they have a contingent interest. Under certain circumstances, these assets can be lost. On the other hand, the determination of what portion of these assets belongs to the bankruptcy estate is probably not a task that any trustee wants to do. So the issue is a very settleable one.

One thing that 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, though distasteful, is effective to ensure that that client or patient never sues.

If the professional owns a business entity that can be marketed, and if that entity or the stock of that entity passes through the Chapter 7 of the principal, then the principal should take care to address early on the adverse tax effects that will inevitably follow the wake of his discharge. The tax basis of the entity will be reduced to zero (IRC Section 108). Care should be taken to avoid these taxes.

Charles Chesnutt