We have received many calls lately asking how bankruptcy can help during the financial crisis triggered by the the Covid-19 virus outbreak. As everyone knows, recent months have seen unprecedented events disrupt the normal patterns of life all across the globe in the wake of the pandemic. This turbulence has left many of us feeling apprehensive, uneasy, and insecure. It has also caused a great deal of financial hardship for both businesses and individuals. Many people are out of work, or have seen their incomes go down dramatically.
The “means test” Form 122A in a Chapter 7 bankruptcy case is surrounded by myth, flawed perceptions, and misinformation. For many people it can be a scary prospect. You hear a lot of conflicting talk in the media about the means test, and everyone seems to have an opinion about one thing or another. Some people say it means one thing, and some people say it means something else. A book says one thing, a website says another. Everyone’s an expert, right? Wrong.
Distressed homeowners in Kansas and Missouri should be aware that there are major differences in how the foreclosure process operates in their respective states. The procedures and processes are very different. We will sketch the general outlines here of how things works in both states.
The official bankruptcy forms and schedules underwent significant changes to their appearance, layout, and presentation on December 1, 2015. It was one of the most important overhauls of the forms in their history.
What does this mean for you? Or does it make any difference at all? We will explore some of the answers here.
You want your case to be a success, and we want your case to be a success. And to ensure that this happens, I wanted to go over some tips and pointers that experience has shown to be some of the best ways to make sure that success happens.
I’ll start with the pre-bankruptcy phase of things, then talk about things to be aware of during the case. And then I’ll talk about things to be mindful of after your case. OK?
All right. Here we go.
What Are Health Savings Accounts (HSAs)?
Health savings accounts (HSAs) have gained some popularity in recent years. The idea is that a person can deposit money in an account and receive tax benefits for doing so. The funds can then be used for the payment of medical expenses when and where needed. The idea seems to be a good one, but it is not without potential pitfalls.
When a bankruptcy case is filed, however, unused money sitting in a health savings account may not be exempt. A recent case from the Eighth Circuit Bankruptcy Appellate Panel (BAP) considered whether certain funds held in a “health savings account” (HSA) could be exempted in a bankruptcy case. The case was In Re Leitch, BAP No. 13-6009, from 2013.
Life can take unexpected twists and turns. We can have all sorts of problems. Some of them are medical problems. Some of them are accounting problems. Some of them are family or relationship problems.
And some of them are legal problems.
But we don’t often find many step-by-step guides on how to solve legal problems. Why is this? Well, there are a lot of reasons: not diagnosing the problem, being misled by the media, or not acting fast enough.
Can an IRA (individual retirement account) inherited from a relative be exempted by a debtor in bankruptcy? No, says a recent Kansas bankruptcy judge’s decision. The case was In Re Mosby (14-22981), decided in June 2015 by Judge Dale Somers. The facts were interesting.
The debtor filed a voluntary petition under Chapter 7 on December 29, 2014. The debtor claimed Jackson Life IRA valued at $15,015.50 as exempt under various Kansas statutes, including K.S.A. 60-2308, 60-2308(b), and 60-2313(a)(1).
A common tactic of creditors in bankruptcy litigation is the attempt to characterize the nature of their debt in a way that is the most favorable for them. It is almost a version of the philosopher Gottfried Leibniz’s old phrase “the best of all possible worlds”: whatever characterization produces the most favorable outcome, that is generally what the creditor will choose. We have seen, for example, loan contracts (drafted by creditors) that basically contain enough contract provisions that they can claim to be nearly anything: a secured loans, a trust agreement, a purchase money security agreement, or a lease.
Such issues have arisen in the context of the issuance of money orders (a trust agreement or a security agreement?) by businesses or “floor plan” arrangements for used auto sales (is it a trust agreement or a secured loan?) When such contracts are eventually brought before a court during litigation in an adversary proceeding or some other bankruptcy-related proceeding, a creditor may point to any number of various (and sometimes conflicting) contract provisions to try to claim that its debt is somehow “special.”
Not surprisingly, courts will often look past such verbiage to examine the actual nature of the transaction between the parties. In bankruptcy court, it doesn’t matter what you call it, what matters is the underlying nature of the transaction. This issue arose recently in a Kansas case in the context of a vehicle contract for the use of a debtor’s car. The financing company claimed the arrangement was a lease. The debtor (In Re James, case no. 12-23121, decided in the District of Kansas in November 2014) claimed the arrangement was a de facto secured loan.
Judge Robert Berger, who issued the decision, pointed to the Supreme Court case of Butner v. United States, 440 U.S. 48, 54-55 (1979) for the proposition that property right questions must generally focus on state law. Following this logic, the Court focused on K.S.A. §84-1-103, which holds that the economic realities of a transaction must be the primary factors in interpreting its essence. In other words, it doesn’t matter what a party calls something; what matters is the actual nature of the transaction (the “economic realities”) that matters. Looking at the fine print of the contract, the Court noted that the “lease” agreement actually gave the debtors the option to become the owners of the goods for no additional consideration.
In addition, the vehicle contract did not give the debtors the option to terminate it, which is supposed to be one of the main features of a true “lease.” Actually, there was a “cancellation” provision in the contract, but it required the debtors to pay the remaining balance due. For this reason, the cancellation provision was a creditor ruse. “Early termination” of the lease was an illusion. Because the so-called “lease” gave the debtors no rational option but to continue making payments until completion of the contract, it was not a true “lease.” The Court found it to be a security interest, and would treat it as such within the debtor’s Chapter 13 plan. Although the car loan could not be crammed down, the terms of the contract could still be modified somewhat in the Chapter 13 plan (interest rate lowered, different payment terms, etc.).
The James decision highlights a tactic frequently used by creditors: fill a contract with fine print that has features of nearly any scenario that might arise. As stated above, we have seen creditors attempt to characterize ordinary, garden-variety commercial loans as priority trust agreements (deserving special treatment), as statutory trusts, as security agreements, as leases, or as other things. The tactic is also used frequently by payday loan establishments in possession of debtors’ checks.
It is becoming more and more common for large institutional creditors to take advantage of their size and unequal bargaining power to compel debtors to sign agreements that may not be what they appear to be. The practice also is found in business situations and commercial loans. Fortunately, the rule here is clear: it doesn’t matter what a creditor says a contract is; what matters is what the economic realities of the transaction are. If you have been saddled with a contract or agreement that a creditor claims to be one thing or another, it is critical to get independent legal advice. Very often, you may have more rights than you think you have.
The past few years have seen an increase in the number of bankruptcy cases filed for dentists and doctors. The reasons are not difficult to comprehend. As average household incomes decline in the economic environment currently existing, expenditures on health tend to decline as well. All but the most necessary procedures are postponed or forgotten. A concurrent rise in operating costs (insurance especially, but also in medication) contributes to the stress of operation. Changing regulations, the confusion sown by new laws, and reduced payments from Medicare and Medicaid reimbursements have not helped matters.
In the United States, medical and dental care providers are essentially run as for-profit businesses. Doctors, dentists, labs, hospitals, and clinics are also run as businesses in most situations. Yet, like many professionals (accountants, attorneys, architects, engineers, etc.), physicians and dentists usually are not trained in school how to run or market a business. At Phillips & Thomas, we have also represented physicians and dentists who have experienced very serious and unexpected events that have contributed to their business troubles.
Like all situations where small businesses are in distress, the most important thing is to take action quickly to address problem areas. We have found, from our experience in representing professionals, that moving quickly to address debt and reorganization issues is absolutely critical. Doctors and dentists face special issues that are not seen in other types of small business debtors. A Chapter 11 filing can do the following:
- Stop certain actions of regulatory agencies that may be seeking to investigate or close down a practice
- Enable the debtor to break out of leases, contracts, or agreements that are weighing on the business
- Stop all creditor calls, harassment, or collection activity
- Enable a greatly-needed “breathing space” for the filing of a plan of reorganization
- Stop the actions of creditors who may be trying to repossess medical equipment or dental equipment
- Stop the actions of tax authorities who may be trying to file tax liens or garnishments for the alleged non-payment of sales tax, withholding tax, or income tax
The key thing is that the filing of a Chapter 11 reorganization will enable a dentist or doctor to continue to do what he or she loves, and also provide a way to continue to operate the business as a going concern. In a Chapter 11 case, the debtor is a “debtor-in-possession” which means that he or she remains in charge of the operation of the business. No one will step into your shoes and try to interfere with how you run your practice. In a debtor-in-possession scenario, no trustee is appointed. You, the owner of the business, retain the rights, duties, and obligations of a “trustee” in dealing with your property and operating the business.
Essentially, you become your own “trustee.” You can obtain new loans and new credit while you are in a bankruptcy. You have the option of assuming, rejecting, or assigning leases or executory contracts that may exist. Our list of articles on this website dealing with Chapter 11 is very detailed and wide-ranging, and can be found by clicking on the tab on the right side of the home page of this site, under “Chapter 11 Bankruptcy In Kansas City.”
From our experience, these are the typical issues that affect physicians and dentists:
- Physical damage or problems with physical premises (fire, accident, etc.);
- Student loan debts are generally much larger than the average debtor. Interest rates can be changed, monthly payments can be changed, and if certain conditions are met, actions can be taken to seek the complete discharge of these debts.
- Data loss from computer network crashes or file management issues that cause a drop in revenue;
- Divorce or dissolution proceedings;
- Increased operating costs (medications or supplies) that affect the bottom line;
- Equipment issues (problems with dental equipment or physician equipment or action by a lienholder);
- Dealing with the large and often collateralized (with business equipment) loans that are typically found in doctors’ or dentists’ offices;
- With dentists or physicians, there can be ethical or professional conduct issues that can relate to client files and ethical obligations for ongoing patients;
- Dealing with the state regulatory agencies or state licensing authorities. State regulatory agencies and licensing bureaus typically do not have a sophisticated knowledge of bankruptcy reorganizations and a debtor’s rights under it. In some cases, these regulatory agencies overreach or fail to understand a debtor’s rights. It is important to have an attorney who knows how to deal with these agencies. At Phillips & Thomas, we have experience in this area.
Bankruptcy reorganizations for doctors, medical clinics, health care providers, and dentists have special issues that are not found in other types of cases. Depending on the goals and situation of the business or individual, it may be necessary to consider all of the relevant chapters of the Bankruptcy Code to see which chapter is appropriate for the situation (Chapter 7, 13, or 11). Again, we can’t stress enough the importance of getting guidance and advice at the earliest stages of difficulty.
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