Personal injury settlements may be awarded by Michigan district or circuit courts for different purposes: lost wage replacement, medical expense damages, caretaker or nursing services, and punitive damages, to name a few settlement categorizations. Depending upon which of these categorizations applies to a specific sum of settlement funds, the settlement may or may not be protectible in bankruptcy.

First, what does it mean to be “protected” in bankruptcy? I have discussed the process of exemption of personal assets in a number of different posts on this blog. To be “protected,” particularly in a Chapter 7 bankruptcy, means that the value of the asset is not so much that the “exemptions” provided for in the Bankruptcy Code are not insufficient to remove that value entirely from the legal “bankruptcy estate” that is created upon the filing of a bankruptcy petition so that the bankruptcy trustee assigned to the case by the Bankruptcy Court does not have jurisdiction to seize and liquidate it.

In other words, certain types of property up to certain dollar-amount values are protected from the seizure-and-liquidation power. Everything else in a Chapter 7 bankruptcy is subject to being seized and sold off by the bankruptcy trustee for the benefit of the creditors whose debts are to be discharged.

With regard to personal injury settlements, the Bankruptcy Code includes an exemption of $21, 625.00. This exemption may be used to protect any of the settlement categories described above—but only to a maximum of that amount. A $30,000.00 pain and suffering compensation settlement amount would thus be unprotected to the extent of $8,375.00.

Additional exemptions apply specifically to other categories and only to those categories. For example, there is a no-ceiling exemption that applies to compensation in replacement of lost future wages (also useful for the protection of worker’s compensation settlements). If an overall personal injury settlement of, for example, $100,000.00 included a lost wages replacement of $50,000.00 only, this exemption would protect only the $50,000.00.

In addition, successful application of these and other exemptions and protections may be significantly easier to execute if the bankruptcy is filed while the claim is still just that—a claim—rather than afterward, when it is a liquid lump sum of cash sitting in a bank account.

If you are a Michigan resident considering filing for bankruptcy and are expecting or hope to receive a personal injury settlement and would like to discuss the ramifications of each process, please feel free to give me a call at (248) 977-4182 or email me at jhilla@aronofflinnell.com to schedule a free, initial consultation.

The question I want to address here, in my first post of the year, is an extremely basic question but one which has been popping up a lot recently. Perhaps because of the economic climate, many of the potential clients I’ve spoken to have asked me about the possibility of leaving one debt or another off of the petition, such as a personal loan from a family-member or friend, or even a debt to a trusted doctor whose services they wish to continue using during and after the bankruptcy.

Unfortunately, the answer to the question is rather quick and easy from my point-of-view: no, you cannot knowingly exclude a debt from your bankruptcy petition. All known debts with a greater-than-zero balance must be listed and, in a Chapter 7, therefore discharged.  Failure to list all of your debts may result in your petition being dismissed entirely or in criminal fraud charges.

If you accidentally leave a debt off of the petition, it is a simple matter to amend the petition to include it prior to receiving your discharge. The court charges a small amount for amendments which add a creditor to your petition, however, the cost of which your attorney may pass back to you. If the debt is not listed but your discharge is granted with no assets to distribute to creditors (i.e., yours was a “no-asset” case), the debt is discharged regardless of not having been listed.

Needless to say, the best policy is to forget nothing and omit nothing and to never have to make such an amendment in the first place. Working patiently with your bankruptcy attorney, who cannot know anything about your financial state of affairs that you don’t tell him or her, is a must. Remember, although it can be aggravating to comb through your personal papers for what is needed to compile a bankruptcy petition completely and accurately, your attorney is there to help you, and it will all be worth it in the end when each of those debts is finally discharged.

If you are a Detroit-area resident of Michigan and would like to schedule a free, initial consultation, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.

Whether these medical bills can be discharged through bankruptcy is, therefore, a question worth answering outright—because so many of my clients do ask it. The answer is slightly different depending upon whether you’re talking about a Chapter 7 or a Chapter 13 bankruptcy, but, in both cases, the answer should give those struggling with impossible medical debt some basis for optimism.

In a Chapter 7 bankruptcy, the answer is an unqualified “YES!” In a Chapter 7, medical bills are treated the same as credit-card and other forms of unsecured debt: they are completely discharged. The only complication arises from debtors themselves, many of whom do have a positive and long-term relationship with their doctors and a strong desire to maintain that relationship. While many Americans have not had consistently high-quality or considerate medical care, others do want to keep using a doctor or other medical professional that they have come to know and trust over many years. They don’t want to “stiff” these doctors.

This is a very common feeling … It is admirable and understandable. But anyone shouldering an amount of medical debt that is so high that it is causing them to consider bankruptcy in the first place is between a rock and a hard place: the doctor did not, in turn, feel sentimental enough about the relationship to charge less in the first place, after all. They may be willing to work with longtime patients in offering payment plans and other options, but, in my experience, most will otherwise have no reservation about referring debtors to aggressive collection agencies to collect the amount owed. Medical collection agencies are among the most obnoxious that I have encountered in my practice, and, in my opinion, no one should feel badly about using the legal option of bankruptcy to protect themselves and their families.

In a Chapter 13 bankruptcy, the answer is slightly more complicated. Chapter 13 is a reorganization process through which debtors and their attorneys pay off debt through a 3-5 year payment plan. Debts are paid according to a certain priority established by the Federal Bankruptcy Code. As in a Chapter 7 bankruptcy, medical bills are classifed as unsecured debt, and unsecured debt is paid lastly in a Chapter 13 plan, after “secured” debt like home mortgages and “priority” debt like federal and state taxes and child-support. There are many requirements for the approval of these payment plans, but, generally, at the end of the 3-5 year period, providing that enough of the unsecured debt has been paid by the plan, the remaining unsecured debt is discharged as in a Chapter 7 liquidation. Therefore, the discharge of medical debt in a Chapter 13 is not as broadly sweeping as in a Chapter 7. Depending on how much credit-card and other unsecured debt a person has, some percentage of the medical debt will have to paid off through the Chapter 13 plan.

Medical debt is out of control in this country. Anyone receiving a bill from their local hospital for something as simple as an MRI test is well aware of this. More complicated procedures can derail a person’s financial planning for years to come. However, bankruptcy, whichever form is most appropriate for each individual, does provide a solution. It is not a solution that always feels right, as doctors are people with whom we all would like to develop a positive relationship. But, after the service has been rendered and the bills mailed, no one should feel badly about choosing to not live as a slave to a type of debt that no one else in our governmental system is working very hard to lower for you, regardless of what the headlines are saying about the insurance “reform” bill working its way through the Senate as I write.

If you have questions about medical bills and bankruptcy, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation.