“Medical Bankruptcy”?

December 21, 2009 by Oliveros & O'Brien, P.C.

Over the years our clients have occasionally asked if they can file a “medical bankruptcy.” This term implies that there is a particular kind of bankruptcy, one with special rules for a person with lots of medical debts. Somehow, somewhere, somebody came up with this “urban myth.” It’s not true. There are no special rules for a person who has primarily medical debts. At least NOT UNTIL NOW. Congress is in fact now seriously considering a law which would give definite advantages to people who have major medical debts and need to file bankruptcy.

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The Medical Bankruptcy Fairness Act has been introduced this session of Congress in both the U.S. Senate and House of Representatives. If these bills are passed into law, this Act would make filing bankruptcy easier and less expensive for those with high medical bills. The two bills are slightly different, but if the terms of both were passed in a combined Act it would:

  1. Stop requiring the “means test” for “medically distressed” people, which would enable more of them to file the much more efficient and less expensive Chapter 7, instead of Chapters 11 or 13.
  2. Exempt them from the “credit counseling” requirement, saving them a procedural step and some money.
  3. Allow them to retain more of their home equity, up to $250,000 (many times more than the current amount in Oregon), helping them keep their homes in all of the bankruptcy chapters.
  4. Permit all people filing Chapter 7 (not just the “medically distressed”) to pay part of their attorney fees AFTER their case is filed, avoiding the need to pay all their fees before filing their case, and otherwise avoiding using a Chapter 13 just to pay attorney fees.
  5. Help the following categories of people:
    1. those who incurred more than $10,000 in medical debts (or sometimes less in situations of lower income) during any consecutive 12-month period during the three years before filing, excluding debts covered by insurance--regardless whether those debts were paid or are still owed;
    2. those who incurred such medical debt not just for themselves, but also their dependents, spouses, and non-dependent members of their immediate family (from grandparents to grandchildren);
    3. members of a household in which one or more members of the household at least 4 weeks of income during a 12-month period were lost “due to a medical problem” of a member of that household;
    4. members of a household in which the household lost at least 4 weeks of spousal or child support payments “due to a medical problem” of a person obligated to pay that support;
    5. those who either became unemployed or “experienced a downgrade in employment status” resulting in reduced wages, lasting at least 30 days, in order “to care for an ill, injured, or disabled dependent” or member of the immediate family.

Keep the following in mind:

  1. Some of the above details are in both Senate and House bills, some are in only one or the other. For any bill to become law, it has to pass both houses of Congress, after differences in the two versions are worked out, often with some parts being dropped and entirely new ones added.
  2. If both houses would pass it, almost certainly President Obama would sign any such bill into law. During his Presidential campaign he advocated strongly for bankruptcy reform for the medically-distressed, including some of the specific changes now being proposed. (Bankruptcy issues are seldom addressed in Presidential campaigns, so he was unusual in directly addressing bankruptcy reform in his speeches and in his formal campaign platform, and doing so with very specific proposals.)
  3. As helpful as some of these changes would be, MOST PEOPLE WITH MEDICAL DEBTS ARE CURRENTLY ABLE TO FILE BANKRUPTCY, CHAPTER 7, 11, OR 13, WHICHEVER IS IN THEIR BEST INTEREST. The proposed changes would primarily help people with a somewhat higher income who under current law would not qualify for Chapter 7, and those with medical debt who have too much equity in their home.

Call us today for a free consultation to see whether a bankruptcy is in your best interest, and whether this potential new law could help you. We will continue to monitor this legislation closely, as we do with all legislation that directly affects our clients. We consider it to be our duty to be at the cutting edge of the law, to do the best possible for our clients. Who you hire as your attorney DOES make a difference. Michael O’Brien is one of only three attorneys in the State of Oregon who is Board Certified as a Consumer Bankruptcy Specialist by the American Board of Certification. Contact him and his staff through the Contact Us tab above.