[1]On June 12, Sens. Elizabeth Warren (D-Mass.) and Sheldon Whitehouse (D-R.I.) introduced S. 2471, the Medical Bankruptcy Fairness Act of 2014,[2] which would amend §§ 101, 104, 109, 521, 522, 523, 707 and 1325 of the Bankruptcy Code to create a new class of “medically distressed debtors.” A debtor could qualify as medically distressed if he/she:
- had unreimbursed medical debts[3] of $10,000 or more in the three years prior to filing;
- had medical debts that amounting to 10 percent or more of adjusted gross income in the prior three years;
- did not receive at least $10,000 in support obligations from someone who was or would qualify as a medically distressed debtor;
- had a change in employment status or income due to illness or the need to care for a close relative; and/or
- was a spouse of a debtor who met any of the above listed conditions.
A qualifying medically distressed debtor would be:
- immune from the means test (but could still be subject to a motion to dismiss under § 707 (b)(3) based on “bad faith” or “the totality of the circumstances)”;
- exempt from the credit counseling requirement;
- entitled to a $250,000 homestead exemption;
- able to confirm a chapter 13 plan over the objection of the trustee or an unsecured creditor; and
- eligible to discharge all student loan debts.
Several prior unsuccessful Senate and House bills have addressed medically related bankruptcies[4] but this one varies from the earlier versions in one important respect: student loan discharge. Student loan debt in the U.S. currently exceeds $1.2 trillion, which is now higher than total credit card debt or vehicle debt. Student loans are not dischargeable in bankruptcy except in extreme circumstances and if the bill was enacted as it is currently written, it could have a profound effect on consumer filings. A debtor who qualifies as “medically distressed” would be given extraordinary protection from creditors, the trustee and the U.S. Trustee.
No firm figures are available, but millions of potential debtors could certainly qualify as “medically distressed,” and many of these debtors have substantial student loan debt. According to a 2013 study by NerdWallet Health, unpaid medical bills are expected to be the number-one cause of bankruptcy filings, surpassing both credit card and mortgage debt.[5] The dollar thresholds are not particularly high, and the clause concerning employment status and income is not specific at all.
The proposed legislation has been referred to the Senate Committee on the Judiciary.
[1] Mr. Flynn serves as a consultant for ABI.
[2] The bill is available at https://beta.congress.gov/113/bills/s2471/BILLS-113s2471is.pdf.
[3] A medical debt is “any debt incurred voluntarily or involuntarily as a result of the diagnosis, cure, mitigation or treatment of injury, deformity, or disease of an individual; or for services performed by a medical professional in the prevention of disease or illness of an individual.” Qualifying debts include those incurred by the “debtor, a dependent of the debtor, or a nondependent parent, grandparent, sibling, child, grandchild, or spouse of the debtor.”
[4] For example, see S. 1624, available at www.gpo.gov/fdsys/pkg/BILLS-111s1624is/html/BILLS-111s1624is.htm; H.R. 5138, available at www.gpo.gov/fdsys/pkg/BILLS-110hr5138ih/html/BILLS-110hr5138ih.htm; H.R. 901, available at www.gpo.gov/fdsys/pkg/BILLS-111hr901ih/pdf/BILLS-111hr901ih.pdf; and H.R. 5138, available at www.gpo.gov/fdsys/pkg/BILLS-110hr5138ih/pdf/BILLS-110hr5138ih.pdf (last visited July 2, 2014).
[5] “In 2013, [more than] 20 percent of American adults are struggling to pay their medical bills, and three in five bankruptcies will be due to medical bills. While we are quick to blame debt on poor savings and bad spending habits, our study emphasizes the burden of health costs causing widespread indebtedness. Medical bills can completely overwhelm a family when illness strikes,” said NerdWallet Vice President of Health Christina LaMontagne. See http://www.nerdwallet.com/blog/health/2014/03/26/medical-bankruptcy/