Milwaukee, WI Bankruptcy Law Blog

Tuesday, May 8, 2018

Medical Bills Weren’t Driving the Rise in Bankruptcies, But They’re Still a Problem

When Obamacare was being debated, we frequently heard politicians saying that one of the reasons the healthcare system needed reform was because it was causing so many bankruptcies. A new study suggests that claims about medical bills causing bankruptcy were greatly exaggerated, but that medical debt is still a big problem for a lot of people.

Back in 2010, President Obama was fond of saying that “the cost of health care now causes a bankruptcy in America every 30 seconds.” A compelling soundbite, and something that stuck in the minds of many. The statistic came from a study by then Harvard professor, now Senator, Elizabeth Warren, and David Himmelstein and Stephanie Woolhandler of Physicians for a National Health Program.

Those of us who worked on bankruptcy cases every day took the politicians and scientists at their word because so many of our clients do have medical debt, but perhaps we should have been more wary since correlation does not always imply causation.

The Washington Post is reporting that a new study on the link between health issues and bankruptcy finds that only around 4% of all bankruptcies are driven by healthcare costs. Carlos Dobkin, Amy Finkelstein, Raymond Kluender and Matthew J. Notowidigdo started with health data instead of bankruptcy data and investigated whether being sick made you more likely to file for bankruptcy than a healthy person. This helped them come up with their much lower estimate of the number of healthcare driven bankruptcies.

This new data is interesting, but it doesn’t mean that people aren’t struggling with medical debt. Many of my clients have medical debt. Many more had a health problem that made it difficult for them to make as much money as they did in the past, which caused them to fall behind on their bills. Bankruptcy can be a good option in either scenario because it can help relieve the stress that money trouble brings, and get the individual who filed back on their feet again.  

Because medical debt is not tied to any collateral, it is a type of unsecured debt, just like credit card debt. This sort of debt is typically wiped out when someone files for Chapter 7 bankruptcy.

Under a Chapter 13 bankruptcy, medical debt is included in the repayment plan devised by the court. If any debt remains at the end of the repayment period, it is typically forgiven.  

Deciding which chapter to file under if some of your debt is medical debt can be challenging. It is tempting to file under Chapter 7 and have it all wiped away, but if you have other debt that is tied to assets you would rather hold onto than forfeit, Chapter 13 can be a better option even though it means paying back debt that could otherwise be forgiven. I help my clients make this decision after reviewing their finances and laying out all of the options available to them, and I would be happy to do the same for you.

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933 North Mayfair Road, Suite 107, Milwaukee, WI 53226
| Phone: 414-436-8428