Bankruptcy of Dentists

Dentists are often forced into financial difficulty because of heavy payments on equipment and practice loans.

From a bankruptcy standpoint, this can place the dentist at an advantage because there is normally a significant difference between the sale value of the dental equipment and the amount of debt on that equipment. Bankruptcy is oriented toward the sale value of the equipment rather that the total debt.

The private dentist normally has two primary choices. The first is to simply leave the office and get a job elsewhere and the second is to reorganize the practice in a Chapter 11.

If the dentist has resided in Texas for 3 1/2 years and files a personal bankruptcy in Texas, the dentist can keep the dental practice (depending on its debt structure and other things), homestead (no matter what the value), contents of the home, tools of the trade and car (depending of sale value) and retirement (no limit). Residents of no other state have laws that protect the debtor to this extent. A move to Texas may be an option for some.

Leaving the office

If the dentist chooses to leave the office, the first consideration is to make sure that the requirements issued by the Board of Dental Examiners are followed. For a simple move, compliance consists primarily of timely patient notification. The dentist may encounter issues related to the transfer of existing business to a new employer because of certain provisions in the Rules of the State Board of Dental Examiners.

The goal for the dentist who leaves a practice is a smooth transition to a new position without any remaining debt or taxes. To accomplish this, the move and the bankruptcy must be planned in advance to assure that there are no surprises.

Reorganizing the Office

A dentist may continue the practice through the reorganization of the practicing entity (normally a corporation, LLC, LLLC, PLLC, PA, PC or partnership). This is done through a Chapter 11. A Chapter 11 can reduce the practice loans and equipment loans. The practice entity files the Chapter 11, not the individual dentist.

For instance, a dental P.C. may have a $1 million note secured by equipment that is worth only $150,000. In a Chapter 11 the bank with the $1 million note will have a $150,000 secured claim that must be paid in full with interest and a $850,000 unsecured claim that does not have to be fully paid. Prior to the bankrutpcy the dentist would be paying the entire note with interest. The effect of the bankruptcy is to reduce the note.

Congress has recently amended the United States Bankruptcy Code in a way that facilitates the reorganization of a dental practice. The effect of these amendments is to reduce fees and eliminate certain objections to the confirmation of a Chapter 11 Plan of Reorganization.

However, the Chapter 11 for the practice is not structured to benefit the individual dentist. It can protect the individual from the bank's lawsuit only in limited circumstances. Therefore, the individual dentist my have to file personally. When this occurs, there are two different bankruptcies and each bankruptcy is a different type.

When structured properly (and depending on the state in which the bankruptcy is filed), both bankruptcies remain "on paper" and the overall debt is reduced and the dentist continues to practice without interruption.

The bankruptcy for the practice entity is called a "business reorganization" and the bankruptcy for the individual dentist is called a "complicated consumer bankruptcy." These two bankruptcies are completely different.

Therefore, the dentist who has signed a guaranty would be well advised to hire bankruptcy counsel who is board certified in both business and consumer bankruptcy law, especially with regard to taxes.

Taxes

Either bankruptcy has a potential taxable effect, but the discharge of debt in the individual bankruptcy (Chapter 7) can have a far more significant effect on the dentist's personal income taxes.

The dentist will discharge the practice and equipment guaranty in the individual bankruptcy. But this is not a taxable event. That is, the amount discharged is not counted as income on the dentist's personal income taxes (see Internal Revenue Code Section 108(b)). But the discharge of debt is not without its taxable effect.

The discharge will reduce the dentist's tax basis in property that is not listed as exempt in the individual Chapter 7, such as the tax basis in investment property or the tax basis in the reorganized dental practice.

The normal effect is to reduce the tax basis in those assets to zero. This means that when the asset is later sold or foreclosed the entire amount of the sale or foreclosure price will be taxable income without any reduction.

Without proper planning, the basis reduction can render a future major tax hit to be inevitable. If the dentist is exposed and the individual bankruptcy is not structured to avoid the basis reduction, then the effect is both disasterous and irreversable.

Charles Chesnutt