Managing Medical Debt Through Bankruptcy

The sluggish economy is not only affecting job growth in the United States, it is also spurring more debt due to medical expenses. According to study conducted by the Commonwealth Fund, 57 percent of workers who lost jobs that previously had health insurance have become uninsured. This creates two problems for those who become sick: Not only do they no longer have health insurance to defray medical expenses, they also lack the income to pay such costs out of pocket.

The Commonwealth Fund also found that debt collection companies contacted 30 million Americans in 2010 because of unpaid medical debts, and nearly 44 million were in the process of paying of such debt. However, many cannot generate enough income to make headway on their debt, as other unpaid bills threaten their way of life.

When this unfortunately common situation occurs, bankruptcy is a consideration in moving past oppressive medical debts.

Medical Debt Under the U.S. Bankruptcy Code

Medical debts can be discharged in Chapter 7 or Chapter 13 bankruptcy in the same fashion as credit card debt and personal loans. They are considered unsecured debt under the U.S. Bankruptcy Code, meaning that there is no property (such as a house or a car) securing the debt. Essentially, medical bills are a service debt – costs and expenses accrued as a result of undergoing treatment for a disease, procedures to correct health problems or administrative fees attached to medical care. Through a bankruptcy petition, you may seek court approval to obtain a discharge, thereby eliminating your legal obligation to pay that debt.

So while creditors can seek legal judgments and even garnish wages to collect on unpaid medical expenses, consumers can seek bankruptcy protection to maintain homes, automobiles and protect savings accrued in 401k and other retirement accounts.

Causes Behind Medical Bankruptcies

Those seeking to discharge medical debt through bankruptcy are not alone. In fact, medical bankruptcies have been growing for decades. A 2009 Bloomberg Business report indicated that in 1981, medical debt was behind only 8 percent of all bankruptcies. In 2011, that number ballooned to 50 percent. In 2007, over 60 percent of filers listed medical debt as the primary reason for bankruptcy protection. Of those, 78 percent had medical insurance, but it was not enough to compensate for high medical costs.

A study by the Robert Wood Johnson Foundation indicated that individuals with chronic diseases such as diabetes, and those with neurological illnesses such as multiple sclerosis, had the highest medical costs. Expenses for these ailments averaged $26,971 and $34,167, respectively. The study also found that hospital bills were the largest single expense for half of all medically bankrupt families.

While there are no specific studies on how medical expenses affect timely payment of other family expenses, such as mortgages, utilities and credit card debt, it is believed that people are generally reluctant to default on medical expenses. Michelle Jones, Senior Vice President of Counseling for CredAbility, a national credit counseling company, explained to CNN that rather than not paying their doctor, people will often take out a new credit card even if their credit is marginal. They will create more debt on their credit cards simply to cover health care costs. Before the real estate market crashed in 2008, people also refinanced their homes and used untapped equity to master medical debts. Both actions alleviated short term debt problems, but high interest rates began to compound and payments quickly became unsustainable.

Medical Debt in Today’s Economy

The specter of bankruptcy is something most people would rather not encounter. As stated before, they instinctively tap all available sources before seeking bankruptcy protection. Most consumers do not realize the options available to them to establish payment plans to manage debt, or how retirement plans are protected in bankruptcy. As such, it is important for consumers mired in debt to understand their legal rights and options before depleting all of their resources in keeping up with medical debt payments.

If you or a loved one is burdened with medical debt, a seasoned attorney can provide the guidance and information necessary to make an informed decision about bankruptcy.