By Ryan C. Wood
Are all people that choose to file bankruptcy equal in terms of why they are choosing to file for bankruptcy protection? No, they are not. Certain types of bankruptcy filers as of today do not have to “pass the Means Test” to qualify to file a Chapter 7 bankruptcy case. Certain debtors are already allowed to claim a higher exemption to protect equity in their homes. Senate Bill 2471 was introduced this year to amend the Bankruptcy Code to give different treatment to people that have significant medical debts and that is purportedly why they are filing for bankruptcy protection. If passed the law would be called the Medical Bankruptcy Fairness Act of 2014. It will make a number of changes to the Bankruptcy Code to make “medically distressed debtors” have more rights to qualify to file a Chapter 7 case, exempt equity in their property and discharge private student loans without proving the loans are an undue hardship than someone who incurred all of their debts from the use credit cards. SB 2471 is attempting to create a separate class of debtors. So why not create a class of medically distressed debtors?
How Does SB 2471 Propose to Amend the Bankruptcy Code?
SB 2471, the Medical Bankruptcy Fairness Act of 2014, proposes to amend the Bankruptcy Code in a few places. The first is the definition section of the Bankruptcy Code, Section 101. If this law were passed it would add the following terms and definitions:
Medical Debt: debt incurred voluntarily or involuntarily—
(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 ill-ness of an individual.
Medically Distressed Debtor:
(A) a debtor who, during the 3 years before the date of the filing of the petition—
(i) incurred or paid aggregate medical debts for the debtor, a dependent of the debtor, or a nondependent parent, grandparent, sibling, child, grandchild, or spouse of the debtor that were not paid by any third-party payor and were greater than the lesser of—
(I) 10 percent of the debtor’s adjusted gross income (as such term is defined in section 62 of the Internal Revenue Code of 1986); or (II) $10,000;
‘‘(ii) did not receive domestic support obligations, or had a spouse or dependent who did not receive domestic support obligations, of at least $10,000 due to a medical issue of the person obligated to pay that would cause the obligor to meet the requirements under clause (i) or (iii), if the obligor was a debtor in a case under this title; or
(iii) experienced a change in employment status that resulted in a reduction in wages, salaries, commissions, or work hours or resulted in unemployment due to— (I) an injury, deformity, or disease of the debtor; or (II) care for an injured, deformed, or ill dependent or non-dependent parent, grandparent, sibling, child, grandchild, or spouse of the debtor; or
(B) a debtor who is the spouse of a debt-or described in subparagraph (A).
So as you can read the definition of what a “Medically Distressed Debtor” is has quite a few twists and turns. The definition seems to be broad and cover a number of circumstances. The one that caught my attention is if a person who is supposed to receive child support but did not due to an illness or loss of employment by the person who is supposed to make the child support payment each month. Someone thought this one through.
SB 2471 also would amend Section 522 of the Bankruptcy Code regarding exemptions. The whole point in defining someone as a “Medically Distressed Debtor” is so they can have a higher exemption. This amendment to the Bankruptcy Code would allow a medically distressed debtor to exempt $250,000 worth of property described as (1) real property or personal property that the debtor or a dependent of the debtor uses as a residence; (2) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence; or (3) a burial plot for the debtor or a dependent of the debtor. Right now in California the most that can be exempted in equity in a house is $175,000 if you meet the requirements.
SB 2471 would also amend Bankruptcy Code Section 707(b) so that a medically distressed debtor does not have to meet the requirements to qualify to file a Chapter 7 bankruptcy case created in the 2005 bankruptcy amendments. A medically distressed debtor would not have to fill out the “Means Test.” This is already true for consumers with primarily nonconsumer debts, disabled veterans and members of the national guard/reservists. Adding medically distressed debtors to this list will not cause much upheaval for experienced bankruptcy lawyers. SB 2471 also seeks to amend the Bankruptcy Code Section 1325(b)(1) to provide a medically distressed debtor does not have to pay unsecured creditors all of their monthly disposable income during the applicable commitment period. This change would allow courts to confirm chapter 13 plans of reorganization over the objections of unsecured creditors.
SB 2471 also amends Bankruptcy Code Section 109(h)(4) to do away with the requirement that a bankruptcy filer complete a credit counseling course within the 180 day period prior to the case being filed. This not a huge perk when filing for bankruptcy protection. This amendment would give a little special treatment and save the medically distressed debtor some time and money. The credit counseling provider we use charges $5.00 for the course and it usually takes a client two to three hours to complete the course on-line.
Possibly the single largest change resulting from SB 2471 if it were passed into law would be to allow medically distressed debtors to discharge their private student loans. Section 523(a)(8) of the Bankruptcy Code would be amended to allow medically distressed debtors discharge their private student loans without having to prove the private student loans are an undue hardship.
The amendment to Sections 522, 707(b), 1325(b)(1), 109(h)(4) and 523(a)(8) would give a medically distressed debtor a significant advantage in qualifying to discharge their debts in a Chapter 7 case, discharging unsecured debts in a Chapter 13 reorganization cases, protecting more equity in their property and discharge private student loans as compared to other bankruptcy filers.
Should Medically Distressed Debtors Should Have Special Treatment
First, the goal to allow bankruptcy filers to exempt or protect more of their assets I absolutely agree with. The goal of allowing bankruptcy filers to discharge private student loans I absolutely agree with. The problem I have with these proposed amendments to the Bankruptcy Code is defining a certain class of debtors to only receive these advantages and not others. I would like to see these amendments apply to all bankruptcy filers, but SB 2471 is a step in the right direction. I am also concerned that if medically distressed debtors can discharge their private student loans then Congress will not amend the Bankruptcy Code to give everyone the right the discharge their private student loans. I would hate to see discharging private student loans limited to medically distressed debtors.