WILL NEW BILL HELP PEOPLE FILING FOR BANKRUPTCY DUE TO MEDICAL DEBT?

A new bill seeks to change the laws governing medical debt bankruptcies, which represent a substantial proportion of bankruptcies in the U.S.

Many people in Irmo, South Carolina, have struggled with medical bills at some point; today, even people with insurance may find it difficult to keep up with rising healthcare costs. According to CNBC, medical debt was identified as a leading cause of bankruptcy in the U.S. during a 2013 NerdWallet study. A recent report from the Consumer Financial Protection Bureau confirmed that over half of bankruptcy cases sent to collections involve medical debt.

Despite the passage of the Affordable Care Act, medical debt remains a substantial problem. Even seemingly reasonable medical costs, such as prescriptions and annual deductibles, can accumulate into substantial debt over time. Unfortunately for people who file for bankruptcy, the filing process and long-term consequences can be unfavorable for people with medical debt.

Unique aspects of medical debt

Medical debt is distinct from other types of debt, The Huffington Post points out. In most cases, people do not know what their healthcare expenses will be when they decide to seek treatment. Even if a rough price is known, unexpected costs often increase the final amount due. Some debtors do not even realize they owe money until they receive notification from a collections agency or notice the debt on their credit report.

According to the same article, people with medical debt often do not fit the profile of a typical debtor. A CFPB survey of 5 million people found that those with medical debt were more likely to repay their debt than people with the same credit score who had other forms of debt. This suggests that credit score decreases may penalize medical debtors too harshly, and that measures, such as credit counseling, may not be necessary for those with medical debt.

In recognition of the differences between medical debt and other types of debt, two senators have introduced a new bill, the Medical Bankruptcy Fairness Act of 2014, which would address some of these issues.

Proposed reforms

The bill would make three key changes to make it easier for medical debtors to file for bankruptcy and move on afterward. According to the bill text, these changes are:

  • Allowing debtors to forgo credit counseling. This counseling is currently mandatory, but it is not typically helpful to medical debtors, who often have little real control over the debts they accrue.
  • Letting debtors exempt $250,000 in property, making it easier for debtors to keep their homes. Currently, most debtors can only keep their homes by filing Chapter 13 bankruptcy, which involves a court-ordered repayment plan.
  • Allowing forgiveness of student loans in certain cases. Currently, debtors can rarely discharge student loans through bankruptcy, even if they have additional forms of debt.

The bill was assigned to a Congressional Committee in June. If the measure ultimately passes, it may help people struggling with medical debt substantially.

In the meantime, anyone considering filing for bankruptcy to relieve medical debt should meet with an experienced attorney. An attorney can provide advice on the different chapters of bankruptcy and help people understand the likely long-term outcomes of filing.

Keywords: bankruptcy, Chapter 7, Chapter 13