By Neil Sosler & Marc Singer
B-Day has arrived. On October 17th, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will go into effect. This past March, we discussed the ramifications of this new law on bare or under-insured practicing physicians. For those who have not anticipated the changes, this is your final chance to be pro-active.
A Brief Review
Physicians, who reduced mal-practice insurance coverage or went bare due to skyrocketing premiums, relied on Florida’s very liberal asset protection laws to protect their personal assets from excessive judgments. Those protections will be restricted as a result of the amendments to the federal bankruptcy code.
Until now, physicians subject to a large malpractice judgment exceeding coverage could obtain a fresh start by filing a Chapter 7 bankruptcy. After doing so, all judgments are discharged; the slate is wiped clean, yet physicians can keep their homestead, retirement plans, annuities, and other protected (exempt) assets.
The Three Main Issues
Homestead
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 doctor would lose their current home under these guidelines since most malpractice cases take 3 - 5 years to reach a judgment. It may be possible 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 one of equal value.
Retirement Accounts
Another provision of the new law potentially limits protection of retirement plans such as IRAs to a maximum of $1 million. This is of serious concern to older physicians who have accumulated a significant portion of their savings in these plans. Alternative strategies could be employed using annuities, which will remain protected.
Chapter 13 vs. Chapter 7
The differences between these two courses of action are perhaps the most critical part of the new law. Previously, if physicians sought bankruptcy protection from a large judgment, they would file Chapter 7 liquidation, allowing them to keep protected assets. The judgment was then discharged leading to the physician becoming debt free. Hopefully, previous proper planning had placed most of their assets under the exempt category. Under the new law, physicians with significant income would have to file for Chapter 13 or Chapter 11 “reorganization”. They could be forced to pay a portion of their income to creditors over many years before any debts would be discharged.
The court would allow for a ‘reasonable’ standard of living, but the interpretation of this status could be debated. 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.
Uncertainty Rules The Day
After discussion with many bankruptcy attorneys, we believe that parts of the new law will need to be litigated to clarify ambiguities in the way it was written. In addition, it is unclear how the bankruptcy court system will handle the fact that many of the Chapter 7 cases that were discharged quickly will now be Chapter 13 cases, in the court system for up to 5 years.
Conclusion
As the difficult environment in which medicine is practiced in Florida evolves, it is imperative that physicians update their asset protection plans and work with financial advisors who understand the intricacies of the new law.
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
