Bankruptcy reform may affect you


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Bankruptcy reform may affect you
By Mark E. Battersby

After eight years of failed efforts by banks and credit card companies, the biggest overhaul of the U.S. bankruptcy laws in the last 27 years will take effect in October.

Did you know that the newly enacted bankruptcy reform law may affect you? Anyone who deals with patients, vendors, and others who seek the protection of bankruptcy — or who are about to — will benefit under the new, harsher restrictions of the bankruptcy laws.

Neither a chiropractic practice — nor its principals — has to be on the brink of financial ruin in order to feel the effects of the bankruptcy rules. According to the U.S. Chamber of Commerce, in fact, bankruptcies cost businesses $40 billion in unpaid bills every year.

At the heart of the reformed bankruptcy laws is the creation of a needs-based “means” test that requires a debtor’s assets and income to be considered when deciding whether the applicant is abusing the system by seeking to obtian a “fresh start” through Chapter 7 liquidation, instead of repaying dbets under a Chapter 13 repayment plan.

The new bankruptcy reform law will benefit professional practices and businesses that are owed money, regardless of their size.

Bankruptcy’s chapters

The different forms of bankruptcy are often referred to by the chapter under which they are covered in the Bankruptcy Code. Chapter 7, which accounts for the majority of non-business bankruptcies, is often referred to as “straight bankruptcy.” In a Chapter 7 bankruptcy, the debtor is allowed to keep certain exempt property while all other property is sold to repay creditors.

The new law will make it much harder to qualify for a Chapter 7 filing. Consequently, it will push more debtors into Chapter 13 filings, which requires debtors to be put on a repayment plan of up to five years.

Other chapters include Chapter 11, used mainly by businesses that want to keep operating and pay creditors under a plan of reorganization; Chapter 12, a special provision governing family farms with regular annual income; and Chapter 15, a new chapter going into effect in October that addresses cross-border solvency cases.

Here are some of the ways:

• No attorney needed. For the first time, creditors are not required to retain an attorney to participate as a creditor. In fact, every creditor may be represented by a “non-attorney” at the first creditors’ meeting. What’s more, in addition to reducing the cost of representing the chiropractic practice’s claim against the debtor, the reformed bankruptcy laws contain several provisions that affect all chiropractors — and their practices.

• Help in evictions. The reformed bankruptcy law amends the current rules to give tenants who declare bankruptcy 120-days to assume or reject a lease. This is double the initial time permitted under the old 60-day rules. The bankruptcy court may, of course, extend the 120 day period by an additional 90 days for cause. Any extension beyond the additional 90 days is available only with the consent of the lessor.

Two new exemptions from the automatic stay are established for landlords seeking to evict tenants. The first allows the continuance of any eviction proceeding in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition. The second deals with evictions based on “endangerment” of the rented property or “illegal use of controlled substances” on the property.

• Recognition of small-business creditors. The new rules “suggest” that small business concerns be added to the appropriate creditors’ committee, those groups responsible for determining who will be paid what.

Thus, any practice, regardless of size, may be represented on the creditors’ committee if the practice’s claim, in comparison with its annual gross revenue, is disproportionately large.

• Improved unsecured creditor status. Although this new loophole was directed at the needs of retailers, every chiropractor will find that their claims as so-called “unsecured trade creditors” enjoy a newly expanded role in the bankruptcy proceedings. Unfortunately, those claims remain subordinate to the interests of a secured creditor.

Bankruptcy may be more difficult — and more expensive — for many individuals and businesses. On one hand, there may be fewer bankruptcies. As a result of these new bankruptcy laws, attorneys are anticipating a decline in their business as well as a reduction in the number of lawyers willing to handle bankruptcies. Under the new law, bankruptcy attorneys will be liable for any misleading statements or inaccuracies in a client’s case.

You should keep in mind, however, that neither your practice nor you has to be on the brink of financial ruin in order to take advantage of the new bankruptcy rules. The new bankruptcy reform law will benefit practices that are owed money.

If you have to file for bankruptcy …

Professionals and business owners have long used bankruptcy to buy breathing room from creditors. The concept of bankruptcy, after all, is to buy time for a financially troubled debtor to develop a rational and fair plan to pay those debts while continuing to operate.

Unfortunately, many debtors used the bankruptcy laws to escape troublesome leases and employee benefit obligations as well as to restructure debt.

The new reforms contain special rules governing the bankruptcy of healthcare businesses.

• Expedited reorganization. The new law establishes an expedited form of Chapter 11 reorganization for professional practices and small businesses with less than $2 million in aggregate debts.

The new process includes a standard form for disclosure statements and reorganization plans, uniform national reporting requirements and rules, enumerated duties that must be performed on schedule, and a general rule that reorganization plans must be filed within 180 days.

After that period, a healthcare business’ creditors can submit their own reorganization plan. That ends the old practice in which creditors were often barred from proposing a plan for years due to repeated judicial extensions.

Under the new rules, if no reorganization plan is filed within 300 days, the bankruptcy case can be dismissed or converted to a Chapter 7 liquidation.

• More court involvement. Small chiropractic practices and businesses will also be required to file regular financial reports, listing not only their profits and losses but also their anticipated cash receipts and disbursements.

Court-appointed trustees will be much more involved in the debtor’s operations than before, reviewing its business plan and investigating whether it has a realistic shot at surviving.

• Accommodation for records management. Under the new rules, the “actual, necessary costs and expenses of closing a healthcare business” are considered administrative expenses.

However, in the case of a healthcare business that has insufficient funds to store patient records, the trustee must attempt to notify patients and/or insurance companies to claim those records. Records that are not claimed or accepted for storage by a federal agency must be destroyed.

• Patient advocate. The new rules also require the appointment of an ombudsman to act as a patient advocate.

When the bankruptcy court appoints a healthcare ombudsman, that so-called “disinterested person” must monitor the quality of patient care, evaluate the debtor’s quality of care, and, in cases where the quality of care is declining significantly or is otherwise being materially compromised, immediately file a motion or written report and give notice to all interested parties.

That trustee must also use his or her reasonable, best efforts to transfer the patients of a healthcare business that is being closed because of bankruptcy to an appropriate healthcare business.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.

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