If you’re like many young Physicians this time of year, you’re excited about getting started in a new practice. For most, this is a happy time. But not everyone.
Odds are this new practice is also in a new area of the country. According to the AAMC 2011 State Physician Workforce Data Book, 61.4% of medical and osteopathic students end up practicing in a different state from where they graduated medical or osteopathic school. And 52.2% of physicians left or didn’t return to the state where they completed their most recent residency or fellowship training.
The new job brings change. New practice, new town, new home, new salary, new benefits, new friends, new everything. Hopefully it’s the last move, at least for a while. Maybe you’re just starting in practice after many years of training or maybe you’re making a big career move to take the job of your dreams. Whatever the reason may be, it’s a huge life change that’s commonly part of becoming an established physician.
But what happens when life doesn’t go as expected? Are you giving yourself enough wiggle room to maneuver when things don’t go as planned?
Planning For The Best
You’ve done everything right so far. You researched the area, found the best school districts, bought a home you love with a mortgage well below what you qualified for. Your kids got into the best daycare. You received a very nice signing bonus which you used to cover moving expenses, buying a car, and paying off credit card debt from residency. Your practice doesn’t withhold any taxes on the bonus. Although you know taxes will eventually be due, you decide you’ll handle that later. There are more pressing issues to take care of.
The student loans were a big priority, so you decided to refinance them and get aggressive with your payments. You ended up settling for the 5 year payoff period because the rate was so low and you knew your income would be plenty to make payments.
But from day one, something doesn’t seem right. For the first few weeks, you’re thinking it’s all in your head. With all the massive changes, there’s bound to be some discomfort.
One month into working for the small practice, one of the other physicians requests a meeting. She’s acting uncomfortable. After some awkward small talk, she rocks your world. It seems there has been a mistake. They should have never hired you and cannot afford to pay your salary. They’re letting you go and today is your last day. She asks you to sign something that formalizes it and without knowing any better you blindly sign the document. Speechless, you walk out of the office. All you can think about is how you’re going to tell your wife. This is bad.
Unfortunately, this type of scenario is relatively common. According to SK&A’s 2015 report on Healthcare Provider Move Rates, the average one year turnover of all physicians is 12%. Urgent Care Specialists top the list at just under 20%. While this survey doesn’t consider tenure, I suspect turnover is even higher for younger physicians starting in practice. That’s a pretty high turnover to be financing big houses and cars before your first day of work.
As you comb through your employment contract, it becomes obvious you have very little protection in this type of circumstance.
The location you’re living in has very few other options for your specialty. You could be forced to move again after only a few weeks. And that in itself comes with it’s own set of issues.
The Home Purchase
You owe $500K on your new home. You were able to finance 100% using a doctor loan which, at the time, seemed like a great deal. It’s a nice house, but there’s just not that many people who can afford this type of home in the area you’re living. The specific house you purchased was on the market for over a year before you bought it. That’s typical of houses in this area at this price range. It never crossed your mind that you’d be having to sell it within months of buying it.
You talk to some realtors and find transaction costs alone have you $50K underwater on the home. And that’s if you get the full price you paid. That’s money you don’t have. So you’re forced to keep the house at least for now until you can build up cash to pay the difference. But you’re not sure how that’s possible.
The Downward Spiral
There’s no cash in the bank. And this next paycheck will be your last for a while. You’re not sure if you’re going to have to pay back your “forgivable loan”. Even if you don’t, there’s no way you’ll be able to come up with the taxes that’ll eventually be due.
Inevitably, you’re forced to start living on credit cards. The house has lots of big expenses that seem much larger without a paycheck. Add in student loan payments and other normal lifestyle expenses and you’re racking up $15,000/mo of credit card debt.
There’s no way you can afford to sell your home even if it sold quickly. It’s underwater and you can’t write the $50,000 check. On the other hand, you cannot afford to move and manage two house payments even with a new salary. So you’re feeling stuck in an area with very few good options. The handful of job opportunities are extremely slow to develop. The only person with any urgency is you.
After 6 months of this nightmare, you’re starting to consider starting over and filing bankruptcy. You’ve racked up almost $100,000 on credit cards. Your home is $50,000 underwater, best case. And this is also right around the time taxes are due. And as a result of the bonus, it’s looking like you’ll owe Uncle Sam at least $30,000. It’ll take $180,000 just to get back to square one. This puts you right on over the edge and you begin taking steps to file for bankruptcy.
How Could This Have Been Avoided
Fortunately, there are steps you can take to avoid this type of financial disaster. New jobs don’t always work out. You should be able to handle this type of unexpected outcome without spiraling into bankruptcy. So where did this new doctor go wrong?
Buying a home with zero equity and this many unknowns is ignorant. It’s setting the stage for unhealthy job reliance and potential for major disastor. There’s no harm in renting for a year to see how things shake out in this new life. You might be able to afford the new home as long as you’re getting paid. But what happens if the job doesn’t work out? That’s one of the biggest downsides of 100% financing with doctor loans. Homes cost a lot to buy and sell. If you’re financing 100%, in reality, you’re probably starting out 10% underwater on the home as a result of all the transaction costs.
All negotiable contracts are worth running by an expert. This includes the original employment agreement and the termination agreement. Something small like a required period of time between notification and termination could have given this doctor some buffer time before the paychecks stopped.
Be cautious when refinancing your student loans and getting that aggressive if you don’t already have your ducks in a row. The private lenders want their money even if you’re not earning money. And a five year payoff is way too aggressive in this circumstance.
Cash is king – especially in times of uncertainty. When you’re approaching a change this big, you should be focused on hoarding cash to provide wiggle room. This physician quickly spent their entire bonus before their first day of work.
Always escrow for taxes. It’s never a good to start the whole “we’ll take care of that later” mentality with taxes. When you earn income that’s not yet been taxed, you must immediately escrow the future tax liability.
Clearly, this person had no experts working in their best interest. Don’t count on mortgage brokers, physician recruiters, realtors or bankers to watch your back. Instead, hire somebody you’re actually paying to work for you and look out for your best interest.
At the end of the day, it comes down to this: plan for the worst and hope for the best. Cover your downside so that you can handle life’s curve-balls.
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