In his 2009 State of the Union Address, President Barack Obama urged Congress to confront the “crushing cost of health care,” claiming that “[t]his is a cost that now causes a bankruptcy in America every thirty seconds.”[1] Like-minded lawmakers subsequently introduced legislation to provide certain bankruptcy protections for medically distressed debtors.[2] Most recently, on June 12, 2014, Sens. Sheldon Whitehouse (D-R.I.) and Elizabeth Warren (D-Mass.) introduced the Medical Bankruptcy Fairness Act of 2014 (MBFA) to help “make the bankruptcy process more forgiving for those driven to insolvency by medical issues.”[3] MBFA supporters maintain that the act “moves in the right direction to address the devastating [economic] impact of serious medical problems.”[4] Opponents argue that the rates of medical bankruptcies are overstated, as most debtors with medical debt are not true medical bankruptcies, and that the MBFA is “open to abuse and fraud[.]”[5] The MBFA was read twice and referred to the Committee on the Judiciary.[6]
Provisions of the Act
The MBFA would amend the Bankruptcy Code to grant special safeguards to medically distressed debtors. Under the MBFA, a “medically distressed debtor” is a debtor who — in the three years before filing a bankruptcy petition — incurred medical debts,[7] not paid by a third-party, totaling more than the lesser of $10,000 or 10 percent of the debtor’s adjusted gross income.[8] A debtor likewise qualifies as medically distressed if the debtor experiences an adverse change in employment status (i.e., reduced wages or work hours) due to health issues suffered by the debtor or a dependent of the debtor.[9] Also qualifying is a debtor who does not receive domestic support of at least $10,000 due to medical costs incurred by the person required to pay such support.[10]
The MBFA would promulgate four fundamental changes to the Bankruptcy Code, which are designed to provide relief for the medically distressed debtor. First, it would increase the homestead exemption for the medically distressed debtor from $22,975[11] under the Bankruptcy Code or applicable state law[12] to $250,000.[13] Second, it would provide that the § 707(b)(2) means test could not be applied to a medically distressed debtor case.[14] Third, it would waive the pre-petition credit-counseling requirement for the medically distressed debtor.[15] Fourth, the medically distressed debtor would qualify for student loan debt forgiveness under § 523(a)(8).[16] In addressing the merits of the MBFA, lawmakers should first answer two questions: (1) is there a national medical debt crisis warranting an amendment to the Bankruptcy Code; and (2) if such a crisis exists, is amending the Bankruptcy Code the most effective cure?
Is There a Medical Debt Crisis?
The underlying premise for the MBFA is that medical debt is a major cause of consumer bankruptcies.[17] “A quadruple jump in medical costs and stagnant income in the last twenty years [have] resulted in increased pressure on a growing number of debtors.”[18] One national survey performed in 2007 found 62.1 percent of all bankruptcies were medical in nature, with percentage of medical bankruptcies as a proportion of bankruptcy filings between 2001 and 2007 having increased to 49.6.[19] “Of these classified ... as medically bankrupt, more than 60 percent had attended college, more than 66 percent at one point owned a home, and 78 percent had health insurance at the time that they became sick or injured.”[20]
A closer look at the data, however, suggests that the 2007 study might be overstating the gravity of the alleged medical debt crisis. For example, in the 2007 study, debtors with just $1,000 or more in medical debt were coded as “medical bankruptcies.” Yet in order to be considered a medical bankruptcy under the MBFA, the debtor must incur nearly 10 times that amount of medical debt.[21] Thus, the low $1,000 ceiling used by the 2007 study potentially exaggerates the causal effect that medical issues have on bankruptcy filing rates. Similarly, the U.S. Trustee Program (USTP) has cited data showing that “90 percent of [bankruptcy] filers had medical debt of less than $5,000” between 2000 and 2002, and “[o]f those reporting medical debts, those debts accounted for only 13 percent of total unsecured debt.”[22] Again, those 90 percent of filers cited by the USTP would in all likelihood not qualify as medically distressed under the MBFA.[23] Given the disparities in these empirical studies, policymakers should explore a more robust analysis of the causal link between medical costs and consumer bankruptcies.
MBFA: A Cure, or a Misdiagnosis?
Notwithstanding the uncertainty unraveled in the empirical analyses, the provisions contained in the MBFA are facially appealing on equitable grounds — provided that the bill does not lead to increased bankruptcy abuse. For instance, exempting medically distressed debtors from the means test seems “appropriate considering [that] the Congressional intent behind the means test ... [was] to address perceived abuses in chapter 7 bankruptcies” — not to punish debtors who involuntarily incur lifesaving expenses inapposite to those who choose to incur credit card debt via frivolous purchases.[24] There is precedent for such a safe-harbor provision: The Bankruptcy Code provides an exception from the means test for disabled veterans who incurred indebtedness while on active duty.[25] Adopting a similar exclusion for medically distressed debtors would be consistent with the intent behind the means test, which was to prevent abuse while ensuring that “those incapable of paying back their debt due to military service or a serious medical condition may not be required to do so.”[26]
Further, according to Hon. Cecelia G. Morris of the U.S. Bankruptcy Court for the Southern District of New York, the increased homestead exemption would provide “medically stressed debtors and caregivers [with] the ability to stay in their homes and close their bankruptcy cases faster so that they may focus more attention on recovery.”[27] “[E]lderly debtors on fixed incomes who own homes with substantial equity could benefit from the fresh start of bankruptcy without losing their homes.”[28]
However, opponents contend that the MBFA is “open to abuse and fraud,” and the data cited above show that “we are misdiagnosing the problem, if we are saying that medical debts are the largest single factor responsible for bankruptcies, when in fact something like involuntary unemployment is, then the solutions we come up with will be equally mis-targeted.”[29] With regard to abuse and fraud, debtors could potentially game the system by intentionally avoiding payment on a medical debt in order to take advantage of the high exemptions and the debt discharge.[30] Removing the means-testing requirement could potentially allow high-income individuals to take advantage of the proposed $250,000 homestead exemption.
Conclusion
While the claimed goals of the MBFA are altruistic, two issues of concern remain unresolved. First, it is unclear as to whether there is indeed a medical debt crisis warranting bankruptcy reform. Second, Congress may be trying to repair a nonbankruptcy problem with a bankruptcy solution; and in doing so, Congress could be opening the proverbial floodgates to bankruptcy abuse. Perhaps the act could be modified to allow medical debtors to obtain relief under chapter 7 on medical debts, not all debts. This may achieve the MBFA’s stated ambitions while reducing the risk of abuse.
[1] President Barack Obama, Remarks of President Barack Obama — As Prepared for Delivery, Address to Joint Session of Congress (Feb. 24, 2009), available at www.whitehouse.gov/the_press_office/Remarks-of-President-Barack-Obama-A….
[2] See, e.g., Medical Bankruptcy Fairness Act of 2009, S. 1624, 111th Cong. (2009); Medical Bankruptcy Fairness Act, H.R. 901, 111th Cong. (2009); Medical Bankruptcy Fairness Act of 2014, S. 2471, 113th Cong. (2014) [hereinafter “MBFA”], available at www.govtrack.us/congress/bills/113/s2471/text.
[3] Press Release, Sen. Sheldon Whitehouse, “Whitehouse, Warren Introduce Measure to Help Families Struggling with Medical Debt” (Jun. 13, 2013), available at www.warren.senate.gov/?p=press_release&id=541.
[4] Hearing Before the H. Subcomm. on Commercial and Admin. Law on H.R. 901, 111th Cong. [hereinafter “House Subcomm. Hearing”] (statement of Hon. Cecelia G. Morris, U.S. Bankruptcy Court for the Southern District of New York) at 89, available at http://judiciary.house.gov/_files/hearings/printers/111th/111-141_57432…. The text of H.R. 901 is nearly identical to the MBFA.
[5] House Subcomm. Hearing, (statement of Aparna Marthur, Ph.D., Resident Scholar, American Enterprise Institute) id. at 97, 110; see also Amy Y. Landry & Robert J. Landry, III, Medical Bankruptcy Reform: A Fallacy of Composition, 19 Am. Bankr. Inst. L. Rev. 151 (2011) (“[A]lthough many debtors have some medical debt, most debtors with medical debt are not ‘medical bankruptcies’... reform will likely lead to abuse of the relief afforded under the Bankruptcy Code.”).
[6] Summary of S. 2471, available at https://beta.congress.gov/bill/113th-congress/senate-bill/2471.
[7] See MBFA, § 2 (defining “medical debt” as debt incurred “(A) as a result of the diagnosis, cure, mitigation, or treatment of injury, deformity, or disease of an individual; or (B) for services performed by a medical professional in the prevention of disease or illness of an individual.”).
[8] Id.
[9] Id.
[10] Id.
[11] 11 U.S.C. § 522(d)(1) (exempting debtor real or personal property interests not to exceed $22,975 with dollar amount to be adjusted by the Judicial Conference of the United States pursuant to 11 U.S.C. § 104).
[12] States may opt out of the federal exemptions. 11 U.S.C. § 522(b)(3).
[13] Compare MBFA, § 3(a) (exempting medically distressed debtor homestead interests up to $250,000) with 11 U.S.C. § 522(d)(1) (debtor homestead exemption is currently $22,975).
[14] MBFA, § 4 (modifying § 707(b) to state means test “does not apply” to a medically distressed debtor).
[15] MBFA, § 5.
[16] MBFA, § 6.
[17] Robert J. Landry, III & Amy K. Yarbrough, Global Lessons from Consumer Bankruptcy and Healthcare Reforms in the United States: A Struggling Social Safety Net, 16 Mich. St. J. Int’l L. 343, 347 (2007) (“It has been empirically shown that the inability to pay healthcare costs is a leading contributor to consumer bankruptcy.”) (citation omitted); Robert M. Lawless, The Paradox of Consumer Credit, 2007 U. Ill. L. Rev. 347, 350 (2007) (medical expenses are a major cause of most consumer bankruptcies).
[18] House Subcomm. Hearing (statement of Hon. Cecelia G. Morris), supra n.4 at 91.
[19] David U. Himmelstein, et al., Medical Bankruptcy in the United States, 2007: Results of a National Study, 122 Am. J. Med. 741, available at www.pnhp.org/new_bankruptcy_study/Bankruptcy-2009.pdf.
[20]Id.; see also House Subcomm. Hearing (statement of Rep Steve Cohen), supra n.4 at 1.
[21] MBFA, § 2.
[22] David Dranove & Michael L. Millenson, Medical Bankruptcy: Myth Versus Fact, 25 Health. Aff. W74, W78 (2006), available at http://content.healthaffairs.org/content/25/2/w74.full.pdf.
[23] MBFA, § 2.
[24] House Subcomm. Hearing (statement of Hon. Cecelia G. Morris), supra n.4 at 89.
[25] 11 U.S.C. § 707(b)(2)(D).
[26] In re Haman, 366 B.R. 307, 314 (Bankr. D. Del. 2007) (quoting 151 Cong. Rec. S1834-01, S1845-46 (statement of Sen. Sessions) (2005)) (emphasis added).
[27] House Subcomm. Hearing (statement of Hon. Cecelia G. Morris), supra n.4 at 187.
[28] Id. at 192.
[29] House Subcomm. Hearing (statement of Aparna Marthur, Ph.D., Resident Scholar, American Enterprise Institute), supra n.5 at 97.
[30] Id.