Bankruptcy of Doctors
Here we assume a Chapter 7. If the doctor 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 doctor, reorganization under a Chapter 7 is often the most advantageous. The reason for this is that the real value of a professional's business 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 or in any way impaired.
A doctor 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 doctor should consist of one meeting that the doctor must attend about 5 weeks later.
Because a doctor's collectable receivables are normally small in comparison to his income and because they are normally much more current than other businesses, the doctor's receivables may not pose a significant problem. This may be especially true if the doctor is working through a professional corporation.
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 doctor owns a business entity and if that entity or the stock of that entity passes through the Chapter 7 bankruptcy filed by 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). Proper care should be taken to avoid these taxes.
Charles Chesnutt