Bankruptcy law in the United States has evolved into a much more complex subject matter over time.  Some would be surprised to learn or be reminded that the framers of our original 1789 Constitution gave Congress the power “to establish . . . Laws on the subject of Bankruptcies throughout the United States.”  In fact, it is based on this clause in our Constitution that all modern bankruptcy laws have arisen.  Thus, the same document that enumerated all of our most basic freedoms and inalienable rights also acknowledged the potential need and benefits of bankruptcy in our nation.  Most people hold the framers of our Constitution in the highest regards, and give great respect to their foresight.  Surely, then, some respect for bankruptcy’s presence in our society must be given on that basis alone.  I run across people who sometimes tell me their belief that filing bankruptcy is “the easy way out” and “un-American.”  Clearly, there is irony in the belief that bankruptcy is contrary to the American way considering its origin in our history.  Needless to say, the history and interactions between debtors and creditors is much more complex than most people realize, and many people take strong positions on the matter without knowing much about the topic.  Bankruptcy plays a vital function in any working democracy, and it is unfortunate that its role in America seems so misconstrued by the so much of the general public. 

People are frequently concerned about the effect a bankruptcy will have on their credit scores.  However, a bankruptcy on a credit report is probably not as bad as most people assume.  It may seem counter-intuitive, but in many situations, a bankruptcy can actually improve a person’s credit.  This is because those in need of bankruptcy probably have bad credit already, which is the reason they are filing to begin with.  If someone has more debt that they can afford to pay, it is going to take a toll on their credit score.  They will have high debt to income ratios, and inevitably will have late payments reflected on their credit reports, which are all detrimental to a person’s credit profile.  A bankruptcy can wipe out all of the bad debt that is causing all of these negative factors to appear on a person’s credit report.  So, while a bankruptcy might not be a great thing to see on a person’s credit, it can be better than the alternative.  Not only that, but the fresh start that a person will have after a bankruptcy can allow someone to start building a positive credit profile a lot faster than if they tried to get themselves out of the debt without a bankruptcy.  A relevant article on this subject was recently written by Jean Chatzky on the NY Daily News titled “There is life after bankruptcy:  Credit could thaw in 18-24 months.”

Once in a while, someone will call our office wanting to speak to a lawyer about a “medical bankruptcy.”  Under the Bankruptcy Code, there is no such thing as a special medical bankruptcy.  A debtor cannot only “claim bankruptcy” on medical debts but maintain their credit cards as usual.  The essential reason for this is that the bankruptcy laws do not allow certain creditors of the same class (for instance here, general unsecured creditors) to get better treatment than others of the same class.  In the eyes of the Bankruptcy Code, all of these creditors must be treated equally, and no such favoritism amongst creditors can be shown.  When people use the term “medical bankruptcy,” what they are referring to is a bankruptcy that was primarily caused by medical debts.  For instance, a 2007 study by the American Journal of Medicine showed that over 60% of bankruptcies  studied were filed primarily due to debt arising from sickness and medical bills (AJM, Volume 122, Issue 8, Pages 741-746 (August 2009)).

The health care reform debate has been a current hot topic for the Obama Administration.  It will be interesting to see its effects on bankruptcy filings.  Based on the current bankruptcy filings related to medical debts, bankruptcy can be thought of roughly as a form of secondary insurance, or sometimes a primary insurance, for those incurring mounting hospital bills.  For these individuals, bankruptcy may be the only way to ensure that they will not drown financially from their health care needs.  The proposed health care reform promises lower costs and better availability of treatment for millions of Americans.  Meanwhile, a bankruptcy may help individuals lower/eliminate health care costs, but it does nothing in regards to availability of treatment.  In fact, due to the negative externalities it generates, it arguably is detrimental to available treatment for many Americans.  Thus, health care reform can provide a great additional benefit in this respect.  However, the larger debate in many people’s minds is whether the Constitution would suggest an implied fundamental right to reasonable health needs, or whether this dubbed “socialized medicine” stretches beyond what our system of capitalism should provide.  Whatever happens, there is no doubt that bankruptcy is a well-established tool for those most impacted by uncontrollable medical debts.

Lately, I’ve been feeling thankful. A few weeks ago I was talking to one of my Chapter 13 bankruptcy clients about how he was feeling overwhelmed financially. He reminded me, however, that there is so much more to life than money and bills. His father-in-law had just passed away. In times of loss, I think we all take that moment to reflect on what is truly important. Oftentimes, bankruptcies coincide with low points in a person’s life, relating to unexpected hospital bills from major sickness, home foreclosures, job loss, or other life-altering circumstances.  His statements inspired me to remember to appreciate and enjoy the loved ones that surround me everyday, in spite of anything that is going on around me. My client then told me that “we may have a lot of obstacles, but we still have a good life.” That is so true; we may have bumps along the way, but overall things are good. Money can disappear in an instant, and money isn’t what makes us happy anyway.