What practice owners need to plan for in a bankruptcy

Physician practices are filing for bankruptcy at a pace not seen in years. Medical Economics reported in July that practice bankruptcies are on pace for their highest level since 2019. The trend reflects a broader rise: total bankruptcy filings increased by 12.2% in the 12 months ending June 30, 2026, compared with the year before.

Many practice owners who reach that point find out too late what a filing involves, from an outside monitor overseeing patient care to years of patient records that still need a home after the doors close. Owners who plan for these issues early keep far more control over how things end.

Why practices are under pressure

Independent physician practices, especially those serving rural communities, are feeling financial pressure from several directions. Many of these pressures are structural, not temporary. A practice that is struggling today is unlikely to simply grow its way out of trouble.

Reimbursement is the first squeeze. Payer rates often fail to keep pace with rising labor, supply and technology costs, while claim denials, prior authorization requirements and payer recoupments slow and shrink collections. Rural practices typically carry a heavier government-payer mix, which leaves them especially exposed when rates change or reimbursements are delayed.

The competitive landscape is shifting, too. Private equity-backed platforms continue to acquire practices, often with significant debt. Independent practices can lose physicians, referrals and payer leverage to these consolidated competitors, and practices that joined a roll-up may find themselves tied to a platform that is itself often over-leveraged.

Mergers bring their own risks. They can create scale, but they also bring integration costs, inherited liabilities, overlapping leases and partner disputes. When an expected merger or sale falls through, a practice that planned around it may be left without a fallback and at significant financial risk.

Then come the everyday strains: physician and staff shortages, rising wages, malpractice premiums, lease obligations, EHR and cybersecurity costs, and debt taken on to expand. In rural markets, losing a single physician or a nearby hospital partner can threaten the whole practice.

The stakes reach beyond the owners. When a rural practice fails, its patients may lose their nearest source of care and/or specialists. Knowing the warning signs, what a filing involves and how to protect patient records can mean the difference between saving a practice and closing it abruptly to the detriment of many, including the patients.

Warning signs and when to call a restructuring advisor

The most valuable action an owner can take is to ask for help early. Early advice keeps out-of-court options on the table, such as a lender forbearance, a negotiated workout, an orderly sale, or a planned Chapter 11 case. Waiting often leaves forced liquidation as the only path, which leads to further disarray in such a process.

These signs mean it’s time to make that call:

• Recurring cash-flow strain. The practice makes payroll by drawing on its line of credit, stretches vendors or delays rent.
• Lender pressure. The practice has missed financial covenants, asked for forbearance, or received new weekly reporting demands.
• Tax payment problems. Unpaid payroll taxes are a serious red flag because owners can be held personally liable.
• Personal guaranty exposure. Owners who guaranteed leases, equipment loans or credit lines should get advice while they still have options.
• Regulatory or payer actions. Audits, overpayment demands, payment suspensions or threatened termination of payer contracts.
• Physician departures or partner disputes, including merger or sale talks that fell apart.
• Litigation, judgments or eviction notices.

An advisor can help weigh the options, which depend on the practice’s circumstances. They range from a forbearance agreement with lenders, to an out-of-court workout negotiated with lenders, landlords, vendors and payers. They also include a bankruptcy case: a Chapter 11 or Subchapter V reorganization, or a Chapter 7 liquidation.

Each path carries different costs, timelines and levels of court involvement. Each also affects patients, records and owner guaranties differently. The right choice depends on the practice’s goals and who its creditors are.

The patient care ombudsman: How to prepare

Many practice owners don’t know that filing for bankruptcy can bring an outside monitor into their practice. When a health care business files, Section 333 of the Bankruptcy Code requires the court to appoint a patient care ombudsman within 30 days, unless the court finds one isn’t needed to protect patients.

The ombudsman monitors the quality of patient care and represents patients’ interests in the case. They report to the court at least every 60 days, and right away if care declines significantly. They can review patient records but must keep them confidential, and HIPAA still applies.

The ombudsman isn’t free. The bankruptcy estate pays for the role as an administrative expense, so it belongs in the case budget from day one.

Practices often ask the court to find an ombudsman unnecessary. That request is stronger when the practice can show:

• Accreditation and good standing with licensing boards
• Strong quality and compliance programs
• Uninterrupted staffing and patient care
• A filing driven by financial or lease problems, not care problems

Owners can prepare before a filing by organizing credentialing, licensure and quality records; documenting staffing and care protocols; confirming that critical vendors such as EHR, labs and suppliers will keep serving the practice; and preparing clear communications for patients and staff. That work strengthens a waiver request and makes the case run more smoothly if an ombudsman is appointed.

Who is responsible for patient records

Filing for bankruptcy doesn’t suspend HIPAA or record-retention rules. The practice stays responsible for its patient records, or in a Chapter 7 case, the trustee does.

HIPAA and state-specific law do different jobs, and both must be followed. States such as Florida set how long physician records are kept and what notice patients receive, while HIPAA governs how those records are protected and disclosed during that time. HIPAA only overrides state law that is “contrary,” so stricter state rules, including longer retention periods, still apply. In practice, follow whichever rule is stricter on each point.

If the practice is sold, the purchase agreement should name who takes over the records. It should also address patient consent and transfer, continued patient access, HIPAA obligations (including a business associate agreement where required) and the EHR vendor contract, since an unpaid vendor can block access to the data.

The hardest case is a practice that closes without the money to store its records. Section 351 of the Bankruptcy Code covers this in health care cases, but only when the “trustee” truly lacks the funds; it isn’t a shortcut to early destruction. The process may take more than a year. The trustee must publish notice, try to reach each patient and their insurer by mail, and ask federal agencies to take any records still unclaimed after 365 days. Whatever is left is destroyed, which is why funding a records custodian is often the better outcome for patients and the estate.

Why a professional records custodian matters

A professional medical records custodian takes over a practice’s paper and electronic patient records when the practice closes, sells or can no longer maintain them. The custodian stores the records securely for the required retention period and answers requests from patients, successor physicians, insurers and attorneys, including subpoenas. It verifies authorizations before releasing anything and securely destroys records once retention periods run out. Custodians typically charge for intake, storage and retrieval, and many offer prepaid arrangements that cover the full retention period.

For a practice in distress, a custodian solves several problems at once:

• The records outlive the business. Retention rules often run well past the end of a wind-down or Chapter 7 case. In Florida, for example, physicians must keep records for at least five years from the last patient contact.
• State law often expects a successor. The board must be told who the new records owner is, and that owner must provide complete copies on written request.
• It prevents abandonment. If records are abandoned, the board may appoint a custodian, and the Attorney General may seek fines of up to $5,000 per violation against unlicensed records owners.
• It protects privacy during a chaotic transition. Staff leave, EHR contracts lapse and offices close. A custodian keeps security and access controls in place, rather than leaving patient information scattered among former employees, physicians and shut-down systems.
• It gives future requests somewhere to go. Requests keep coming after a practice closes. Without a custodian, a subpoena may reach a practice with no one left to answer it. With one, the response is a simple referral.

The custodian agreement matters as much as the choice of custodian. It should cover retention by license type, release procedures, fees limited to actual cost as each state’s law requires, and eventual secure destruction.

Plan early

The time to line up a records custodian, and a restructuring plan, is while the practice still has staff, working systems and cash. Once a lender has swept the accounts or the EHR vendor has cut off access, the options narrow fast.

Starting early lets a practice compare custodians, negotiate terms and coordinate data extraction with its EHR vendor. It also lets the practice set aside money for the custodian, which gets harder once cash is tied up in a workout or bankruptcy. And it keeps patient records out of the Section 351 destruction process.

The same is true for the practice itself. Owners who act on the warning signs early have more paths to keep caring for patients. Those who wait often find the decision has been made for them.

Brian Rich is a bankruptcy and restructuring attorney at Berger Singerman in Tallahassee, Florida. He represents distressed companies, commercial debtors, creditors’ committees, lenders, bankruptcy trustees, receivers and other court-appointed fiduciaries, and has led complex Chapter 11 cases across health care, real estate, retail and hospitality. He is a past president of the Bankruptcy Bar Association for the Northern District of Florida.