Bankruptcy and Medical Debt

A difficult economy creates resulting fallout of its own. Businesses and manufacturing have downsized and have reduced or eliminated the benefits of workers who have managed to keep their jobs. The cost of healthcare continues to increase. The recently unemployed are often faced with high prices for COBRA, the program to bridge the gap after job loss so a worker can maintain health coverage for a period of time. Frequently, because of dwindling savings, people go without adequate healthcare coverage.

In the past few years, studies have shown that a greater percentage of Americans are choosing bankruptcy due to the pressures of unplanned medical debt. One study by CredAbility has reported nearly 20 percent of people have identified medical bills as the primary reason for declaring bankruptcy. This trend is up almost eight percent over several years. Sudden illness or catastrophic injury is usually devastating to the finances, particularly if it befalls one of the household’s primary wage earners.

Reports have indicated that most people who fall into the medical debt spiral do so for a variety of reasons. With the rise in unemployment, many families find themselves suddenly without medical insurance until new employment is secured. Many people find paying high premiums too difficult, so they purchase plans with cheaper premiums but higher deductibles. When misfortune befalls, they are not prepared for the rapid rise in medical bills.
The New York Times reports that health consumers tend to overextend in an effort to pay off medical debt at the outset. However, with little savings or an unsure job situation, these consumers resort to paying the initial medical bills with new or existing credit card accounts. Within a brief period, interest builds. Interest combined with reduced income may put some families and individuals into an insolvent condition. Further compounding financial difficulty, catastrophic injury or long term illness usually necessitates extended treatment and rehabilitation. Medical bills can mount.

Consumers quickly learn that medical debt, owed to hospitals or practitioners, is sent to collection agencies relatively early in the default process. Medical offices and hospitals lack the staffing and time to attempt debt collection on their own. These institutions do not have the time or resources to focus on collections. The trend is to outsource defaulted debts to third party collectors. Consumers who find themselves underwater feel pressured and stymied by the collection process. At this point, bankruptcy becomes a real option.

Individuals seeking bankruptcy protection against medical debt may consider Chapter 7.  St. Louis Bankruptcy Attorney Tobias Licker wrote a post about this issue in the Missouri Bankruptcy Blog. This form of bankruptcy may release a consumer from what is called “nonpriority general unsecured debts.” Medical debt will fall under this category. This type of debt will be eliminated once the Chapter 7 process has been discharged. Most clients qualify to file a chapter 7 bankruptcy case. In order to qualify, the debtor’s attorney will do a so called “means test” which is the average monthly income for the last 6 months. If the monthly income is below a specific amount, the the debtor automatically qualifies to file a chapter 7 bankruptcy case. If the income is above the median income, the attorney will look further at all expenses and other payments. If the disposable amount, that is the amount one has left after paying all their expenses, would not pay a meaningful amount to creditors, the debtor still can file a chapter 7 bankruptcy case. If the means test shows that there is still money left every months, the debtor can file a chapter 13 bankruptcy case and pay the portion he has left over each month to his creditors. At the end of the chapter 13, all debt paid or unpaid will be discharged. The means test has a few exceptions, especially for disabled veterans and National Guard or Reservists who incurred most of their debt during active duty.

For the consumer who qualifies, Chapter 7 may be the best option to eliminate medical debt and credit card debt incurred while attempting to pay for healthcare. People seeking to file forbankruptcy in the St. Louis Metro Area are welcome to contact the Licker Law Firm for a free consultation. Our firm has four offices through out the St. Louis Metro area: Florissant (North County), St. Louis (Hampton Ave), St. Charles and in the St. Louis Metro east, in Granite City.


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One Response to Bankruptcy and Medical Debt

  1. Ella Cereo says:

    Yet another good reason for folks to always consult with a bankruptcy attorney before filing. This is a good thing to know.

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