Dealing with Medical Debt Through Bankruptcy

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With today’s economic conditions, serious injuries or illnesses can cause serious financial upheaval. Prolonged ailments requiring long recovery periods can deprive people of their ability to earn a living. It is common knowledge that most people are one severe illness away from being in financial ruin.

It’s true that many working Americans still have health insurance through their employment. But millions of people have lost their jobs in the Great Recession and the struggling economy that has followed the official end of the recession. Even for those who are still employed, fewer employers provide full health coverage – the kind that covers large expenses caused by serious illnesses.

A Real Story about Medical Expenses

The story of Marsha and Simon Sutherland is a good example of the problem of medical debt. The birth of their daughter, Ellie, was fraught with complications. Ellie was sent to the neonatal intensive care unit (NICU) just after she was born and stayed there for 25 days before going home. The NICU stay cost the Sutherlands nearly $75,000, but their insurance plans did not cover the medical expenses they incurred.

And that was only the beginning. For her entire life, Ellie had continual medical problems. She was nearly deaf, couldn’t sit up and was prone to dangerously high fevers. By her second birthday, she began scratching at her eyes and cheeks and biting her lip until she bled profusely.

Marsha and Simon did whatever they could to find out what was wrong with their daughter. They made two trips to Johns Hopkins in Baltimore, seeking to have her illnesses diagnosed. She underwent extensive blood panels to determine whether there were missing genes. Meanwhile, Ellie visited specialists in Florida on a weekly basis to address problems with her hearing, eyes, spine and gastrointestinal system.

Both Marsha and Simon had health insurance through their respective employers. Marsha was a full-time reading teacher at an Orange County public school, and Simon was a manager for a pizza chain. However, their insurance companies often sparred over which company would pay for expenses. Even though Marsha’s insurance had a $10,000 cap on out-of-pocket expenses, her insurer refused to pay when the bills came due.

Taking care of Ellie became a full-time obligation, so Simon became the sole breadwinner for the family. Aside from the medical expenses, paying the mortgage was a struggle for the Sutherlands. They approached their lender about a modification, only to be offered a plan with higher monthly payments. A month after Ellie’s second birthday, the Sutherlands filed for bankruptcy.

Medical Debt under the U.S. Bankruptcy Code

Although creditors can seek legal judgments and even garnish wages to collect on unpaid medical expenses, medical debt is considered unsecured debt Under the U.S. Bankruptcy Code. This means that there is no property (such as a house or a car) securing the debt.

As such, medical debts can be discharged in Chapter 7 or Chapter 13 bankruptcy in the same fashion as credit card debt and personal loans. Depending on your overall circumstances, you may qualify for Chapter 7 (called liquidation bankruptcy) or Chapter 13 (wage earner’s bankruptcy). Upon proper application, you may seek court approval to obtain a discharge, thereby eliminating your legal obligation to pay that debt.

If you are considering bankruptcy because of medical debts, you are among a growing contingent seeking relief from oppressive costs and fees. According to one study on bankruptcy filings, more than 60 percent of all bankruptcies filed were due to medical debt. Debtors seeking bankruptcy protection averaged $17,943 in medical expenses and 75 percent actually had health insurance. Nevertheless, it is possible that many people have experiences similar to the Sutherlands, where medical insurers refuse to pay legitimate claims.

Medical Debt in Today’s Economy

It is debatable whether medical costs, by themselves, are actually causing more people to file bankruptcy. There are no concrete studies on how such costs affect payment of other family expenses, such as mortgages, utilities and credit card debt. It is also unclear to what extent job losses contribute to the problem. It should be noted, however, that the healthcare industry has become so inflexible in negotiating debt settlements that lawsuits have become the new normal. With more than 59 million uninsured Americans, it is likely that “medical” bankruptcies will continue – at least until federal health insurance reform fully takes effect.

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

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