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  • 1099 payments if practice closes/files for bankruptcy

    I get paid on a monthly basis (by the 15th of the following month) based on a % of my production. I’m seeing cracks in the viability of the practice at this time and have heard whispers of them going under. If such occurs prior to the payroll cutting me the prior months check, is there anything I can do other than cry about the spilled milk? Any recourse to get my contractually agreed upon % in this scenario (if such did occur)?

    Worth having a conversation with the office manager to see about getting paid half my daily production each time I walk out the office (though they wouldn’t be thrilled during times like this)?

    I have a lot of sunk efforts if they decide to shutter shop Apr 15 (essentially all of what I’ve done Mar 1-Apr 17–when I’d receive the paycheck—would have been without compensation).

    Any tax considerations I could at least dampen the blow with?

    Thanks

  • #2
    You can try to adjust the pay frequency. Secured creditors will be paid first. This is why vendors put a customer on hold or COD. You can switch to COD. Because you are 1099, you are a vendor not an employee. If unsecured creditors get 50 cents on the dollar, you won’t show as a creditor, but the judge might make you pay back half.
    Typically, clawbacks are related party transactions for the benefit of the owner/officers. You can demand past, current or both. If it’s a cash squeeze, they won’t like it. So what, you simply don’t want to work for free. Business transaction.
    Possession is 99% of the law. Not a thing wrong with collections. Now how you get them to give you a check is a different question. Just a tough negotiation. Do they get paid cash? If they don’t, where do they get the additional cash? That’s their issue. Try for a win/win solution. Weekly?

    “A preferential debt payment is a payment made for the benefit of certain creditors shortly before filing for bankruptcy. ... The bankruptcy trustee has the power to avoid (undo) preferential payments and recover that money or property to distribute among all of your creditors.”
    ”Employee claims for pre-bankruptcy wages, salaries, and vacation, sick and severance pay, as well as unpaid contributions by the employer to employee benefit plans, are given priority over other unsecured claims up to a maximum of $12,475 per employee.”

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    • #3
      I’m sorry you’re having to worry about this right now. Probably little you can do right now other that give notice and get a position in another practice. If they are having trouble paying their bills, it’s unlikely they are going to change your payment terms. And, asTim noted, preferential payments will be clawed back. And, we’re just over 2 weeks from 4/15. If there really is a bankruptcy, it will be very cut and dried as to what you and other creditors get.

      Main tax consideration is that you won’t be paying tax on income you don’t receive. I’m sorry, but that’s about it. One other thought - do you participate in a retirement/benefits plan that, for some reason, does not fall under the protection of ERISA? Unlikely, but need to consider whether it is at risk.

      All said, hearing whispers around the office is not the same as concrete evidence and rumors do tend to take on a life of their own...

      EDIT: Went back to the title of the thread after posting my answer. As a 1099 contractor, you don’t have retirement benefits and I THINK would fall into the category of unsecured creditor (unlike employees).
      Last edited by jfoxcpacfp; 03-29-2020, 07:32 AM. Reason: Edit at end.
      Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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      • #4
        “"Clawback" is the term used to describe this power, which allows the trustee to regain assets should have been part of the debtor's bankruptcy estate, but were removed or hidden from the trustee by the debtor by means of preferential or fraudulent transfers.”
        “The look-back period, or period of time that the trustee can go back to unwind these transfers, is ninety days for general creditors and one year for insiders (relatives or someone with a close or influential relationship with you.”

        The office manager in a liquidity crunch will most likely be asking the owner for cash. Vendors (1099 included) often demand payment (including COD) to get collections. Not all payments for 90 days are preferential or fraudulent. But as Johanna said, you are exposed and may have paid tax as well. It will be difficult to get the cash. Not sure why 4/15 is important. If they pay you as a favor, is that preferential? Payment on a demand isn’t preferential. Happens all the time pre-bankruptcy.

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        • #5
          Thanks for the replies. 4/15 is the date they usually do payroll for the prior month. So all work I do between 3/1 and 4/14 is without any paycheck until actually delivered 4/17 (generally 2 days from their payroll to providing me my check). The 4/15 check is to cover all work I did 3/1-3/31 but since I won’t have received it until the 4/15 (or more precisely 4/17), it means I will be working without remuneration for a 45 (or 47) day period. Makes me nervous in an office where the shoe could drop any day.

          I did pass a message up the chain to request 3/1-3/31 payments on 4/1. We will see, but I’m not optimistic given the reality of the strapped financial status of the practice at this time.
          Tim
          Last edited by Krentist; 03-29-2020, 12:23 PM.

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          • #6
            Regarding claw backs, does this mean that even if I’m paid what I’m contractually owed prior to any bankruptcy announcement, that I could potentially have to return some/all of these monies?

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            • #7
              Additionally, if the office closes (ie furloughs their employees) for a period of time or indefinitely, but hasn’t filed bankruptcy, would vendor payments still be expected/due (ie receiving what I as a 1099 vendor, had contractually earned)? What recourse would I have to obtain such if the office is closed but not bankrupt?

              @jpfoxcpacfp

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              • #8
                Maybe Hank will comment, but I think the remedy in this situation w/b to file suit based upon the contract you have with the office.
                Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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                • #9
                  Originally posted by jfoxcpacfp View Post
                  Maybe Hank will comment, but I think the remedy in this situation w/b to file suit based upon the contract you have with the office.
                  Thanks. I think that’s still 13 steps down the road at this stage, but in the accelerated COVID times today, 13 steps may be just around the corner.

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                  • #10
                    Originally posted by Krentist View Post

                    Thanks. I think that’s still 13 steps down the road at this stage, but in the accelerated COVID times today, 13 steps may be just around the corner.
                    Best wishes and good health to you and your family,Krentist
                    Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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