Overwhelmed by Medical Bills

It does not take a lot before an illness results in sizable medical bills. Often, the more serious the illness, the more serious the bills. Even people with insurance coverage can find themselves with bills from uncovered providers, uninsured procedures, or huge deductible and co-insurance burdens. For the most part, the debt from medical bills is not special for bankruptcy purposes. It is typically an unsecured claim, often paid pennies on the dollar, if at all, and then wiped out by the bankruptcy discharge.

Medical debt is unusual because the medical industry, by law and by professional standards, allows patients in certain situations to receive care without regards to creditworthiness or ability to pay. There are few comparable situations where an ordinary individual can incur thousands of dollars of charges to be paid after services are rendered. Institutions with a duty to provide care, such as certain hospitals, are faced with a complex business model where everyone is paying something different for the same basic care.

Unfortunately, some medical institutions have chosen to aggressively employ debt collection agencies to collect their older medical bills. It often comes as a surprise to the patient-debtor when a hospital with a caring and civil public face comes after him or her with the tactics of a credit card collector. To add to the problem, such collections often seek the list-price chargemaster rate, which may be significantly higher than what the institution is accepting from insurance companies and the federal government for the very same care.

This highlights one practical point about medical debt--the amount is not necessarily fixed in stone. Overwhelming medical bills are more susceptible to negotiation and settlement than traditional financial product debts such as credit cards and mortgages. As with any kind of settlement, it is important that the patient-debtor get the agreement in writing.

However, as I stated at the beginning, the unusual way that medical debts come into being do not affect their basic bankruptcy character as unsecured dischargeable loans, absent unusual circumstances. Bankruptcy is often among a person's better options once it has become apparent the amount of medical debt cannot be managed or repaid. This is particularly true if medical debt collectors are bringing intense pressure on the debtor.

One unusual point merits mention. A common law rule known as the "doctrine of necessaries" can in some situations make one spouse responsible for a medical debt of the other spouse. If a creditor asserts this doctrine in its claim, the medical debt might become a joint debt. Assuming a creditor bothers to do this, it will not practically affect many joint bankruptcy cases. The exception is the case where a married couple is relying on tenancy by the entirety to protect assets. Such is usually only the case where there is a large amount of equity in a residence, i.e. more than $60-70,000, or where two or more properties with equity are owned by the spouses. In such a case, the presence of joint debt could result in the sale of the property in a chapter 7 bankruptcy or greater payment of the claim in chapter 13 bankruptcy.