Florida Medical Business
Oct. 18, 2005 – Nov. 7, 2005
Part 1 of 2
By MAUREEN GLABMAN
A South Florida surgeon without liability insurance receives a $7 million judgment in a medical malpractice case. Of his assets, a $1 million home, $300,000 in an IRA and $600,000 in annuities, he pays the plaintiff only $30,000 from minor unprotected property, and $40,000 to his attorney in legal fees, discharging the lion’s share of debt under Chapter 7 bankruptcy.
Since he no longer owed the judgment, he kept his license under Florida’s strict financial responsibility laws.
This case, from the files of a local asset planner, took place before October 17 when the most sweeping changes to the federal bankruptcy code in 25 years took effect. Florida physicians will now find it tougher to go bankrupt or bare.
New provisions, entitled “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” may alter the way doctors respond to the state’s medical liability insurance crisis. Florida physicians pay some of the highest premiums in the nation, according to the Chicago-based independent newsletter, Medical Liability Monitor.
“The whole concept of going bare is that as a last recourse, doctors could file Chapter 7 bankruptcy and discharge debts, including judgments,” said Arthur Spector, JD, a former US bankruptcy judge in Michigan who now practices law in Fort Lauderdale. “The bankruptcy option for many doctors may have been taken off the table,” added Stanley Foodman, CPA, a Miami forensic accountant who assists attorneys and judges in uncovering hidden assets.
Measures affecting doctors include IRA and homestead equity limitations, fraudulent creation of trust documents and an income test for determining ability to repay debt. Some of these became effective earlier this year when President George Bush signed the bill.
At least since 1987 when the state’s “bare law” took effect, allowing doctors to practice without malpractice coverage, estate attorneys and financial planners have suggested the “bankruptcy strategy” as a practical answer when faced with a devastating medical malpractice judgment.
In this scenario — touted especially for Florida’s “bare” or underinsured doctors — homes, annuities, life insurance policies and IRAs are protected from plaintiff-creditors by federal and state laws. Trusts, bank and investment accounts are kept in the names of others and also are protected. Since there are no assets for creditors to attach, doctors absolve themselves of judgments and live as they did before bankruptcy.
“A doctor could be in and out of bankruptcy court in 90 days with all debts discharged,” said Marc Singer, a Coral Gables asset advisor, whose firm, SingerXenos Wealth Management, counts 300 bare physicians as clients. “The judge would let him keep his protected assets. The day after bankruptcy, he had a clean slate. He had his home and an ‘inconvenient’ credit rating.”
New code changes, though, spurred by an eightyear campaign by banking, credit card and retail industries intended to crackdown on deadbeats who rack up credit card debt recklessly only to shed it under Chapter 7, will make sheltering assets from creditors more difficult.
As a result, some Florida financial advisors say bankruptcy and going bare may no longer be realistic approaches to the state’s medical malpractice crisis. They suggest doctors reassess asset plans, bite the bullet and buy liability coverage, or move to states where insurance is cheaper and there is less frequency of lawsuits.
Others advisors deem new laws merely a blip. “The risk is a lot greater, but with proper planning, going bare could still be viable,” maintained Jerome Wolf, JD, a Boca Raton asset protection attorney who works with doctors.
Wolf, Singer and others argue there are plenty of escape mechanisms in the new code. “Creative lawyers tend to find loopholes and strategies no matter the legislation,” Wolf pointed out.
And bankruptcy remains a hammer for bare doctors, according to Singer. “We’ve used the threat of bankruptcy in about 100 cases to help achieve reasonable settlements with plaintiff attorneys.” He doesn’t’ expect that to change under new laws.
LOOPHOLE 1: Income Test
About 70 percent of all consumer debtors who seek bankruptcy protection choose Chapter 7 debt liquidation, according to a Harvard Law School and Harvard Medical School study on bankruptcy, released in February. A random survey of Florida asset protection attorneys say their doctor clients also typically select this type of fresh start. Under the new law, physicians who earn less than the median Florida income based on 2004 Census Bureau data — $59,798 for a family of four — can still erase obligations under Chapter 7. Through, physicians with higher incomes, which are most, may be shifted into Chapter 13 reorganization, a multiyear repayment plan. An excess of $100 or more per month, after household expenses, could be turned over to a bankruptcy trustee to pay plaintiffs for up to five years. Salaries are calculated by averaging the six months prior to filing.
“If a doctor fails the means test and has excess income, the judge could dismiss a Chapter 7 bankruptcy case or convert the case to Chapter 13,” explained Bradley Shraiberg, JD, a Boca Raton bankruptcy attorney who lists doctors as clients.
Asset planner Singer does not see this as catastrophic. “If a self-insured doctor making $200,000 a year has to pay $10,000 for five years for a $6 million judgment, the doctor would say ‘no problem.”’
In a situation where a bankruptcy judge determines the doctor has to turn over excessive amounts of his salary, he could just quit or take a hiatus, Singer urged. “If there is no income and no ability to repay creditors, the bankruptcy may be converted to a Chapter 7, then erased.”
LOOPHOLE 2: Homestead
Previously, a physician could take his investment account and plow it into a Florida home. That home would truly be his castle since creditors could not take it.
Florida and Texas are among few states with generous homestead exemptions. These exemptions protected actor Burt Reynolds, major league baseball commissioner Bowie Kuhn and Wall Street financier Paul Bilzerian, from losing their sunshine state homes in bankruptcy. It is said to be the major motivating force behind O. J. Simpson’s move from Los Angeles to Miami.
New laws, however, specify a home purchased within 40 months prior to a
filing of bankruptcy qualifies for only $125,000 in equity protection. “Doctors may have to sell their property to satisfy a judgment,” said Samuel Gerdano, executive director, American Bankruptcy Institute, Alexandria, Virg.
To avoid exposure, physicians should consider buying a dream house and staying put, Singer advised. “There is unlimited protection if you have lived in your home longer than 40 months.” Recent court cases in Arizona and Florida support and conflict with this “unlimited protection” theory. The issue may be decided on a case-by-case basis.
LOOPHOLE 3: IRA Limitation
Under 2005 code changes, simple IRAs once protected in unlimited amounts are now covered only up to $1 million. But rollover IRAs are not included in the $1 million, according to Singer, who is advising clients to keep money in qualified pension plans as well as IRAs.
For example, if a doctor had $1 million in an IRA and $1 million in a pension fund, both would be protected. And, the $1 million in the pension fund could rollover safely into the IRA.
LOOPHOLE 4: Asset Transfer
Another concern in the new law is a 10year “lookback” on all transfers of property, such as cash, previously only four years. For example, if in the last 10 years, a physician set up the popular family limited partnership, a bankruptcy judge could determine that it was created merely to avoid paying a malpractice judgment and seize the asset.
If a doctor, who believes he may be cited for negligence, takes money from a bank account and pays down a mortgage, those funds could be seized too. And finally, to the extent his homestead was obtained through fraudulent conversion of non-exempt assets during the 10-year period before the filing, the homestead exemption is reduced by the amount attributed to the fraud, said Foodman, the accountant.
“All asset protection devices are now subject to scrutiny and possible undoing because of the 10 year lookback. A judge will ask: ‘Was it done withintent to defraud creditors?”‘ said Boca Raton attorney Wolf.
Singer and others contend fraud issues will not stand up in court against doctors if assets are transferred before a suit is filed. “How could you commit a fraudulent conveyance if you hadn’t yet met the plaintiff-patient at the time you did your estate planning?” Singer asked. “Doctors don’t have a liability until they get sued and they don’t have an absolute liability until they receive a judgment.” Spector, the former bankruptcy judge agreed. “These trusts, if set up as part of an estate plan, may have nothing to do with patients,” he said. “Doctors could say ‘I don’t plan my life around planning for a malpractice judgment.’ The statute could be toothless if these arguments prevail.”
LOOPHOLE 5: Intentional Divorce
A less popular, but nonetheless valid option, is to divorce a spouse intentionally to make him or her a creditor. Before code changes, a spouse with alimony and child support decrees was simply among a listing of creditors seeking a portion of assets. Code changes give top priority to a spouse’s claim.
The idea is not so’ far fetched. In the 2003 comedy, “Going Bare” by Mary Jane Taegel, an obstetrician drops liability coverage because of large premiums. When he receives a $4.2 million judgment, he and his wife conspire to get a divorce. The play has received good reviews in theaters across the country.
In all, physicians should not be concerned about being left with a bad credit rating following bankruptcy, Singer concluded. “Doctors with significant salaries and net worth usually don’t have a problem getting credit.” Florida financial advisors contacted universally agree the new bankruptcy law is vague, “It’s going to be subject to interpretations by the courts. It hasn’t been tested and no one knows how it’s going to end up,” say Miami accountant Foodman.
Nonetheless, some doctors are jittery. The combined effects of bankruptcy code changes, and the “three strikes” rule that automatically revokes physician licenses after three malpractice judgments, is causing some physicians to take stock and change course.
Healthcare Underwriters Group of Florida, a Dania medical malpractice carrier, reports that since January, more than 60 bare doctors have applied for coverage compared with 30 in all of 2004.
FPIC, the state’s largest malpractice carrier, has seen no such migration of bare doctors back to coverage. However, a few groups that have been bare for years have inquired about pricing, said James Bishop, FPIC’s vice president for marketing. Some doctors are also asking about increasing policy limits.
And some are simply packing up, said Clearwater asset protection attorney Alan Gassman, JD, who advises many physicians. “I’ve had clients go to Mississippi, Indiana and other states,” he said.