New bankruptcy legislation would require repayment

June 1, 2005

The major intent of bankruptcy reform is to require people who can well afford to make some payments toward their debt do so, while still affording them the right to have the rest of their debt erased.

A. Physicians faced with filing for personal bankruptcy (often to assist in limiting excessive judgments from medical liability lawsuits) may soon be seeing substantial changes to the rules. The Senate recently passed legislation by a vote of 74 to 25 that may cause physicians to seek other avenues in the event of financial difficulty. The Bankruptcy Abuse Prevention and Consumer Act of 2005, if approved by Congress, will go into effect in October and will require many consumers to repay a portion of the money owed, as opposed to simply walking away from the debt.

Historically, physicians have preferred filing Chapter 7 bankruptcy, also known as "straight bankruptcy," since it calls for a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee, who then converts it to cash for distributions to creditors. Exempt property, such as ERISA qualified retirement plans, and the state-mandated maximum allowable homestead exemption amount, is not included.

Another alternative, the Chapter 13 bankruptcy, is a reorganization bankruptcy. Chapter 13 is filed by individuals who want to pay off their debts over a period of 3 to 5 years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep, such as real estate, autos, and boats. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

Unfortunately, this method reduces disposable income, thus putting a physician's long-term savings ability, as well as his current standard of living, in jeopardy.

The major intent of bankruptcy reform is to require people who can well afford to make some payments toward their debt do so, while still affording them the right to have the rest of their debt erased. The reform, however, would require most physicians to file the less-desirable Chapter 13, as opposed to the generally preferred Chapter 7, due to the way that eligibility would be determined. A series of tests, such as the following, would be used to determine if the debtor has the financial capacity to pay some money to creditors: