How Common Is “Medical Bankruptcy”?

stethoscope-cashWhile a professor at Harvard Law School, now-Senator Elizabeth Warren co-authored a controversial study published by The American Journal of Medicine. This article — Medical Bankruptcy in the United States, 2007: Results of a National Study — made the bold claim that “62.1% of all bankruptcies in 2007 were medical.” Is the percentage really that high?

Like many legal questions, I’d say the answer here is, “It depends.” The Bankruptcy Code doesn’t provide a legal definition of “medical bankruptcy,” so we have to look at the authors’ criteria for classifying a particular bankruptcy case as “medical.”

What Makes a Bankruptcy “Medical”?

The study’s Table 2 lists the various “Medical Causes of Bankruptcy” (emphasis mine) determined by the authors. One of them immediately caught my attention: in 34.7% of the bankruptcy cases sampled, the debtors listed medical debts that exceeded either $5,000 or 10% of the family’s annual income.

I don’t doubt the accuracy of the 34.7%/$5,000/10% figures. As an Indianapolis bankruptcy attorney, I find the majority of my cases involve at least some medical debt, and it’s certainly not uncommon for me to have over $5,000 in medical bills listed in a single bankruptcy. But I disagree with the suggestion that all of those cases were “caused” by medical debt.

Cause Versus Effect

Everyone who hires me for bankruptcy representation has the same basic problem: they can’t pay their debts as those obligations come due. And when people don’t have enough money to go around, they have to pick and choose who’s not going to be paid. Given that medical providers are usually unsecured creditors — that is, they don’t have a lien on any assets that could be taken from you — it’s reasonable to put medical bills for past services at the bottom of the list, where they often pile up. In this situation, medical debt is an effect of money problems, but it’s not necessarily a cause.

Medical Bankruptcy Is Very Real

Still, while the Warren study may have overstated the prevalence of “medical bankruptcy,” I do file cases that were truly caused by serious medical debt. I’d estimate that 10% of my caseload falls into this category. In one memorable case, I reviewed a single hospital bill demanding immediate payment of over $31,000 — and that was after an insurance company had paid its share!

Now that “Obamacare” is the law of the land, it’ll be interesting to see whether medical bankruptcies become less common, and if so, to what extent. But since people can forego health insurance in exchange for paying a tax penalty, I don’t see the problem disappearing entirely.

Matt Conrad is an Indianapolis bankruptcy attorney and the founder of Conrad Legal LLC, which helps people in Central Indiana get out of debt with Chapter 7 and Chapter 13.

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