Marc Singer, CFP & Niel Sosler
Currently, Congress appears ready to pass the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Since physicians have been forced to reduce malpractice insurance coverage or go bare due to skyrocketing insurance premiums, they have relied on Florida's very liberal asset protection laws to protect their personal assets from excessive judgments. Those protections may be restricted as a result of the amendments to the federal bankruptcy code currently being considered.
Why is Bankruptcy So Important to Physicians?
Until these changes go into effect, a physician subject to a large malpractice judgment exceeding coverage could obtain a fresh start by filing a Chapter 7 bankruptcy. Bankruptcy has become the ultimate threat to plaintiff attorneys.
After a Chapter 7 bankruptcy, all judgments are discharged. This means the slate is wiped clean, yet the physician can keep their homestead, retirement plans, annuities, and other protected assets. In bankruptcy courts, assets are classified as either exempt (protected) or non-exempt (non-protected).
Under certain circumstances, only $125,000 of a homestead would be protected.
Is Your Home Still Protected?
Homestead in Florida is constitutionally protected. The new law would limit homestead protection to $125,000 if the home was purchased within 40 months of a bankruptcy. It is unlikely that any physician would lose their current home under these guidelines since most malpractice cases take 3-5 years to reach a judgment. It may be possible for the physician to delay a bankruptcy should the 40-month timeframe be an issue. This new limitation would prevent a physician from upgrading to a substantially more expensive home in the middle of an active malpractice case. The new law does specifically allow for rolling over equity from a current home to another home of equal value.
While in bankruptcy, doctors could be forced to pay creditors for many years.
Chapter 13 and 11 vs. Chapter 7
These terms normally do not mean much to the practicing physician, but it is perhaps the most critical part of the new law. Previously, if a physician sought bankruptcy protection from a large malpractice judgment, they would file a Chapter 7 liquidation. Following a Chapter 7, the physician keeps protected assets, the judgment is discharged, and the physician is debt free. Hopefully, the physician had done proper planning and had virtually all their assets under the exempt category. Under the new law, a physician with significant income would be forced to file for Chapter 13 or Chapter 11 "reorganization". The physician could be forced to pay a portion of their income to creditors over many years before any debts are discharged. The court would allow for a reasonable standard of living, but their definition of "reasonable" significantly differs from most physicians' definition. It is unclear what courts would do if a physician simply retired and no longer generated a salary that could be used to pay creditors.
Retirement Plans
Another provision of the new law potentially limits protection of retirement plans to a maximum of $1 million. This is of serious concern to older physicians who have accumulated a significant portion of their life savings in these plans. Alternative strategies using annuities, which remain protected under the new law, could be employed to protect retirement plans.
What Can Be Done?
Before this bill goes into effect, physicians should review their investment and asset protection plan. While previous approaches may still be effective, this significant change demands a check-up and possible tune-up. There are many innovative strategies available to physicians depending on their personal circumstances.
Conclusion:
The new law has far reaching consequences for physicians in Florida. We have developed a new lecture and presentation on this topic. Please call us to schedule this seminar at your hospital.
Further Reading: Legislation would limit protection of doctors' assets
Singer Xenos is an established wealth management firm specializing in physicians with $500,000-plus in investments. We manage over $500 million in assets such as retirement plans, annuities and personal accounts, with an emphasis on wealth building and protection from malpractice claims. Physician Asset Advisor and Singer Xenos do not provide legal advice.
Coral gables / Ft Lauderdale / Tampa / orlando 888.289.0060
