Congress Pushes Bankruptcy Aid For Those Financially Suffering From COVID-19 | SmithAmundsen LLC
Democratic senators have revived a bill to ease bankruptcy for Americans suffering from financial hardship related to COVID-19. The Medical Bankruptcy Fairness Act (the “Proposed Act”) has been unsuccessfully introduced several times before, but with the recent change of control in the Senate and the election of President Biden, many observers are convinced that the bill has now its first legitimate chance to become law. If enacted, the bill will not only make filing for bankruptcy less administratively burdensome for some filers, but will also provide additional benefits that are currently not available to other filers.
First, the bill creates a new designation of debtor, called “debtor in medical distress” as well as a new category of liability defined as “medical debt”. As might be expected, a “debtor in medical distress” includes a potential filer who spent specified amounts on medical expenses (currently the lesser of 10% of the filer’s adjusted gross income or $ 10,000). Any debtor claiming the designation will be forced to file a certificate that the Medical Debt was not contracted with the aim of reducing the debtor to the meaning of “Debtor in Medical Distress”. But in an apparent recognition of the link between job loss and loss of health insurance, the bill also appears to define a “debtor in medical distress” as any debtor who had reduced income or who lost their job ” because of ”COVID-19.
The proposed law would also release a debtor in medical distress from the credit counseling requirement that almost all debtors since 2005 have had to meet. The credit counseling requirement has been a staple of individual bankruptcy filings for over 15 years and was aimed at providing financial education to debtors who may never have had such a credit education. The idea behind eliminating the credit counseling requirement seems to be that a debtor in medical distress has ended up in bankruptcy through no fault of his own and therefore should not need additional financial education.
However, the proposed law does not simply facilitate the bankruptcy filing process, the proposed law aims to provide several extraordinary benefits to a debtor in medical distress that are not available to other filers. As currently drafted, the proposed law would provide medical distressed debtors with an exemption of up to $ 250,000 in their residences (if state exemption law provides for less than that amount). In other words, the creditors of the debtor in medical distress could only recover the residence of the debtor in medical distress to the extent that the value of that residence exceeded $ 250,000. The average price of homes in the United States hovers around this amount. So in reality it appears that the proposed law is trying to ensure that most debtors in medical distress will not lose their homes after filing for bankruptcy. This is clearly a very different outcome than what other bankrupt filers face.
Finally, the bill also has an impact on the treatment of student loans from debtors in medical distress. Notably one of the most difficult obligations to avoid in bankruptcy, the proposed law is a game-changer for student loans from debtors in medical distress. Currently, to have a chance of paying off most student loan debts, a debtor must initiate adversarial proceedings in their own bankruptcy case (essentially legal action within the confines of the main bankruptcy case). ) and convince a bankruptcy judge that certain “undue hardship” exists to excuse the repayment of these student loans. Without going into too much detail on how this could be accomplished, suffice to say that historically this is an extremely difficult argument to succeed on. But the proposed law appears to eliminate this whole process and procedure and simply make student loans purely and simply dischargeable for filers considered to be medically distressed debtors.
It is still too early to guess the chances of the proposed law becoming law, but if it does, it has the potential to radically change how the bankruptcy process works in a world still grappling with the financial fallout from the COVID pandemic. -19. Given the remarkable additional benefits offered to debtors by the proposed law, combined with the relatively broad definition of a debtor in medical distress, debtors and their lawyers may go above and beyond to accommodate the proposed law. I only hope that legislation designed to help those who are truly suffering the financial repercussions of the pandemic does not turn into ongoing litigation over who is or is not a “medical distressed debtor.”