Medical Malpractice Debts

            Sorry about not posting in a while – the start of the fall semester and the submission of job applications has taken considerable time.

            I would like to discuss a topic that is, admittedly, not as common an issue for most debtors as those I have previously discussed, but still interesting in my view.  Broadly speaking, this is the ability to discharge a debt under section 523(a)(6), which is for “willful and malicious injury by the debtor to another entity or to the property of another entity.”  Narrowly speaking, I will be discussing this in the context of medical malpractice debts. 

            Speaking very generally, a debtor can discharge the equivalent of a negligent tort, but not something that would amount to an intentional tort.  A tort is, broadly speaking, a wrongdoing for which the law provides a remedy in a civil case.  To illustrate in a simple example, if I am driving my car, drop my cell phone on the floor, and I accidentally run over a person who later sues me, I can probably discharge this debt in bankruptcy.  I use this example rather than drunk driving, as that presents somewhat different rules under 523(a)(9) – I’ll write more on that in a later post.  If I am driving my car, see a person whom I dislike, put the pedal to the metal and purposely hit that person who later sues me, bankruptcy will not relieve me of this duty (as it shouldn’t).

            A special situation, then, arises for physicians and other medical professionals.  The leading case on this subject was issued by the Supreme Court in Kawaauhau v. Geiger, 523 U.S. 57 (1998).  In a unanimous opinion issued by Justice Ginsburg, the Court held that a debt arising from a medical malpractice judgment for negligent or reckless conduct was dischargeable in bankruptcy.  Despite its unanimity among the Court members, I recall feeling great skepticism the first time I read the case, and still find its reasoning somewhat questionable.  I have chosen to write about this case, in part, because when I was a staffer on an academic journal last year, I realized that I wanted to write about this subject at a point when it was too late to make such a decision.  But I digress. 

            In Geiger, the patient had a foot injury.  She sought treatment from Dr. Geiger, who prescribed her oral penicillin in order to reduce the risk of infection, despite his knowledge that intravenous penicillin would have been more effective.  Dr. Geiger then left for a trip, and upon his return, overruled the decision of other physicians to transfer the patient to an infectious disease specialist, as he believed the infection was less severe.  Dr. Geiger was wrong, and the patient eventually had to have her right leg amputated below the knee. 

            The patient then sued Dr. Geiger, and obtained a judgment for about $355,000.  Dr. Geiger, having had his wages garnished as a result of his lack of malpractice insurance, then filed for bankruptcy.  The Bankruptcy Court for the Eastern District of Missouri did not allow this debt to be discharged, holding that it Dr. Geiger’s actions were below prevailing medical standards, and so amounted to “willful and malicious” injury in 523(a)(6).  The District Court agreed. The U.S. Court of Appeals for the Eighth Circuit reversed, holding that the exemption from discharge is confined to actions amounting to an intentional tort, and allowed the discharge.

            The Supreme Court agreed to hear the case, and affirmed the Eighth Circuit’s decision to allow the discharge.  The Court interpreted 523(a)(6) to mean that the exception from discharge is limited to acts done with the intent to cause injury.  Applying the statute to mean that all acts done intentionally which cause injury was too broad of a standard for the Court.  It went on to say that intentional torts “generally require that the actor intend ‘the consequences of an act,’ not simply ‘the act itself.’”

            I don’t take issue with the reasoning in general.  The result in the case of medical malpractice debts in particular seems inequitable to me, though.  Why not hold professionals, such as physicians, to a higher standard?  Dr. Geiger, without malpractice insurance (which he probably should have had), decided to practice medicine in a manner that he knew was less effective.  The patient alleged that this was simply a cost-cutting measure.  The result for the patient was that she had a good portion of her leg amputated, and yet did not receive any compensation from her physician who was, by all accounts, negligent.  To me, a physician such as Dr. Geiger should have known better than to practice medicine in this manner, whether it was for cost-cutting or not.  Generally in tort law, physicians and other professionals are held to a higher standard of care than the average person.  To me, it only makes sense for this special standard of care to translate to a special exception for discharge in bankruptcy as well.  Otherwise, the higher standard of care may be reduced to a lack of meaning should the physician file for bankruptcy.

            The Court’s decision was well-reasoned.  The Bankruptcy Code, then as today, does not provide an exception of discharge for medical malpractice debts.  Near the end of the Court’s opinion, Justice Ginsburg writes that although the Court declines to make a policy exception for discharge for medical malpractice debts, “Congress, of course, may so decide.  But unless and until Congress makes such a decision, we must follow the current direction § 523(a)(6).”  It’s in Congress’s hands to fix what I perceive as an inequitable loophole.  I’m not getting my hopes up.

            I expect to write again next week on a topic which applies to (nearly) all individual debtors: state exemptions from the bankruptcy estate.  I’ll focus on my state of Virginia, as it has some interesting provisions.  Thanks for reading.

-JP

The Benefits of Bankruptcy

Last weekend I watched the movie Larry Crowne, starring Tom Hanks and Julia Roberts.  In the movie, Tom Hanks plays a character that had recently been terminated for his job due to his lack of formal education, so he decided to go back to community college to remedy the situation.  He took an economics class there with an eccentric professor.  One day, the two of them were outside the school having a discussion on whether there were any economic benefits to filing for bankruptcy, I believe with Tom Hanks arguing that there were not and the professor arguing that there were.  Granted, this was not the focus of the film (and I haven’t known bankruptcy to be a topic discussed in economics classes – I didn’t discuss it in mine), but the professor was right.

Bankruptcy is not something that a person should strive for.  We all know that.  However, for the honest debtor who finds himself or herself in a truly difficult financial situation which is unanticipated, bankruptcy does operate as a “fresh start,” which is its stated goal.  What I generally mean by an “honest debtor” is a debtor who is not committing fraud by doing something like running up credit card debts in anticipation of bankruptcy, but that’s for another blog entry.  In this entry, I will be referring to consumer bankruptcy.

The most pervasive aspect of the fresh start is through the discharge under section 523.  A bankruptcy discharge simply relieves the debtor from any further personal liability for the debts covered by the discharge.  A bankruptcy discharge does not, however, eliminate the debts: the ability of creditors to look to other parties such as guarantors and insurers is unaffected.  And, a bankruptcy discharge does not eliminate liens: the ability of secured creditors to look to their collateral is unaffected.

There is also the automatic stay under section 362.  This means that from the moment you file for bankruptcy, your creditors cannot attempt to collect the debts that you owe them.  They cannot send you letters or call your phone (by the way, even if you don’t file for bankruptcy, creditors are required by law to obey you if you tell them to stop calling your cell phone at any time, though you can’t make them stop calling your home phone without the automatic stay).  They also cannot do things like terminate your utilities with the automatic stay protection.  A creditor can be held in contempt for violating the automatic stay.   

In certain situations, bankruptcy can also help a debtor’s credit score.  This is because individuals who file for bankruptcy in the first place typically have low credit scores in the first place, often with things like late payments and charged-off accounts.  When consumers receive the bankruptcy discharge, the items will be marked as included in a bankruptcy, rather than showing a high account balance, or otherwise being a bad debt.  To be certain, this is not always the case; in a generic sense, the bankruptcy filing, in and of itself, will lower a consumer’s credit score.  It is only the effect on the consumer’s other accounts that can sometimes improve a credit score.  I should also mention that bankruptcy discharge can only stay on a credit report for ten years. 

There is also plenty of free assistance for those who need it.  I spent my summer in 2011 working only on pro bono bankruptcy cases.  They were referred to us by Legal Services of Northern Virginia.  The individuals who received the pro bono assistance did not get the bankruptcy representation for absolutely nothing – they still had to pay small fees to, among other things, pull their credit reports.  They did not, however, have to pay several thousand dollars in fees, which is typical of a bankruptcy filing. 

Bankruptcy is not always a bad thing.  For the honest debtor who finds herself in a difficult economic situation, it can provide a fresh start, free of phone calls from creditors and personal liability for debts.  Though it is often expensive to hire a bankruptcy attorney, there are often programs (such as those in Northern Virginia) to provide assistance to those who cannot afford the attorney’s fees.  Based on the complexities of the bankruptcy code, though, it is probably not a good idea for most debtors to file bankruptcy pro se (without legal representation).

Thanks for reading.  I’ll be back with a new post within the next few weeks.

J.P. Morgan

Credit Reform

As a person who regularly checks his credit report, I was surprised a few years ago when one of the credit bureaus reported that I had filed for bankruptcy.  This was not true; I was only eighteen or nineteen at the time, and had no reason to file.  It was actually a family member of mine who had filed for bankruptcy.  Adding to the absurdity of the situation was that the bankruptcy had been filed in 1995, when I was only 7 years old.  Despite the inherent nonsense, I still had trouble convincing the representative of the credit bureau over the phone that the bankruptcy did not actually belong to me.  I eventually got the situation resolved, but it took a lot of needless time.

Of course, that was not the only account listed on my credit report that did not actually belong to me.  There were multiple other accounts past due which were incorrectly attributed to me on my credit report.  I believe I have had incorrect listings on my credit report every time that I have checked it, including earlier this year.  Based on the way that credit reports are currently structured, it seems to me that the system runs contrary to its stated goals.

First, I should mention that the only website that will give you an actual free credit report every year is AnnualCreditReport.com.  It will give you your reports for Equifax, Experian, and Transunion.  I find it troubling how few people are aware of this; television, of course, is littered with commercials for websites with misleading names about the prices of their credit reports, which lead to monthly account charges. AnnualCreditReport.com is mandated to exist as a consequence of 2003’s Fair Credit Reporting Act, and will provide anyone with a truly free credit report once every year.

The goal of credit reports, as I understand it to be, is to provide information on the worthiness of a customer to receive credit.  Some aspects of the credit report adequately serve this function: if I were considering lending money to a consumer, I would certainly like to know whether that consumer has recently defaulted on loans, has filed for bankruptcy, or has substantially more debt than income.

My main problem, though, is that a consumer’s credit score lowers when the consumer has his or her credit checked, whether that is by the consumer or by a potential lender.  This, to me, should be changed.  Whereas things like bankruptcy and past due accounts generally show a degree of financial mismanagement, frequent checking of one’s credit is indicative of diligent awareness of one’s creditworthiness.  Even beyond this, people in my situation, with incorrect information constantly showing up on my credit report, have somewhat of a “damned if you do, damned if you don’t” scenario.  If I fail to check my credit report frequently, then incorrect information shows up and I don’t have the chance to correct it until I have already been denied credit due to the faulty information.  If I do check my credit report frequently, my credit score will consequently decrease, and I will similarly have a difficult time obtaining credit.  I am aware that there are services available which alert consumers about changes to their credit reports, but I have trouble believing that every consumer should have to pay a monthly fee to utilize such a service, considering the mandatory nature of having reports with the three major credit bureaus for any consumer who wishes to obtain credit.

If that aspect of the credit system does not change (or even if it does), then new procedures need to be put in place to ensure that information on credit reports is actually correct.  For example, for any information that appears on my credit report, if either the creditors or the bureaus had bothered to verify that my social security number matched that of the delinquent debtor, they would have discovered quickly that the accounts did not actually belong to me.  Instead, however, many of these creditors see a similar name and/ or the same address, they incorrectly report the debt to the credit bureau without any further verification.  A mandatory social security number verification, by either the credit bureau or the creditor, would easily resolve this situation.

When incorrect information does appear on a consumer’s credit report, the consumer’s remedy is to submit a dispute to the credit bureau.  The credit bureau will then contact the creditor and ask them to verify that the information is correct.  If the creditor fails to report back to the bureau with affirmation that the information is indeed correct, then the credit bureau is legally required to remove the information.  This system is not perfect either, however.  With at least one account that has incorrectly been reported as mine on my credit report, I disputed the account, and the company STILL reported incorrectly that I was past due on an account with them.  When the credit bureau contacted the company, the company was lazy enough to report back to the credit bureau that I actually did owe them money, clearly without adequate verification.  I eventually got in contact with this company and asked why they still reported that I owe them money, even after the dispute gave them reason to believe that the information was faulty.  Their response was that they get hundreds of those every day, and sometimes these things just slip through.  I dislike a mandatory credit system that allows for corporate laziness to harm consumers in such a way.

My solution is for Congress to act on this and either put more stringent requirements to verify credit information or to remove the disincentive to check one’s credit report frequently.  The system, as is currently is, produces bizarre results and incentives that often do not reflect creditworthiness, but instead harm consumers for forces beyond their control.  Unfortunately, this is not a talking point that receives much attention in the media, so I am not confident that such changes are imminent.

Please let me know what you think.  Unlike my previous blog entries, this one is largely based on opinion, and I am curious to see whether other have similar gripes.  Also, you may have noticed that I said I said in my last entry that I would write about the discharge of medical malpractice debts.  I felt more motivated to write about this at the moment.  I’ll probably write about that at some point.  I plan on writing every other week from this point, and I am not sure at the moment what my next entry will be. Please come back here in a couple weeks and find out. Thanks for reading.

J.P. Morgan

Student Loans

Last week, I came across an article in the Washington Examiner while I was riding the metro to work. This article noted that residents of Maryland carry more student loan debt than any other state in the country at $33,087. Virginia ranked sixth at $30,855. The average is $29,088. Compared to the debt load I will be carrying due to law school, these numbers actually seem rather modest to me, but they still go to show that student loan debt is on the rise, especially in this geographic region. I try to put my thoughts of future student loan payments at ease by reminding myself that I am getting a degree in a (hopefully) lucrative field, but it is not only law students who are racking up substantial amounts of student debt. The debt, of course, can get crippling for young graduates. In connection with this, I have heard many espouse the false statement that student loans cannot be discharged in bankruptcy. The statement is false for its overbreadth; while student loans generally cannot be discharged in bankruptcy, the Bankruptcy Code does contain an exception in certain situations.

To explore this, I ask that you open up your copy of the Bankruptcy Code to section 523(a)(8). It reads:

“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt — unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for — an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”

So what does this mean? Probably the two most important words in that paragraph are “undue hardship.” It’s the key to this whole thing. The Bankruptcy Code does allow individuals to discharge their student loan debt; they just have to prove that they have an undue hardship.

What does undue hardship mean? First, I’ll tell you what it does not mean. I recall once hearing a former Bankruptcy Judge discuss an individual who attempted to have his student loans discharged in a case before him. This individual was a dentist. When said Judge asked him why a man with a good job and (presumably) good earnings would have an undue hardship in paying his student loans back, he responded that it was too difficult to balance paying off his student loans with the payments for his new expense sports car (I think it was a Porsche).

The judge did not consider this to be an undue hardship.

I should mention before I go further that I was inspired to write this blog in part because of an excellent podcast I recently listened at the American Bankruptcy Institute’s website (www.abiworld.org). I recommend that you check it out. Said podcast discussed the different tests that the Circuits use to determine what constitutes undue hardship. Since I suspect that most people reading this live within the Fourth Circuit (Virginia, Maryland, West Virginia, North Carolina, and South Carolina), I’ll discuss that rule first, which also happens to be the majority rule in the United States. The Fourth Circuit, like most other Circuits, has adopted the rule from the 1987 case of Brunner v. New York State Higher Education Services Corp., decided in 1987. Brunner contains a three-prong test to determine whether a debtor in bankruptcy meets the test for undue hardship:

(1)   “that the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans;”

(2)   “that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans;” and

(3)   “that the debtor had made good faith efforts to repay the loans.”

Under Brunner, a debtor must satisfy all three of those qualifications in order to qualify for undue hardship. There are some additional factors that courts use in making these determinations; for example, did the debtor successfully graduate from her program, or does she simply have looming loans from four years’ worth of college and no degree? Can the debtor pay back at least a portion of the loans? What are the debtor’s career prospects and earning potential?

Not all courts have used this test, though. The Eighth Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) instead uses a totality of the circumstances test to determine whether a debtor would have an undue hardship in paying off educational loans, which is obviously a less strict test than the majority of courts use.

For whatever reason, a good portion of the population seems to believe that there is no way that student loans can be discharged in bankruptcy, but 523(a)(8) and cases modeled after Brunner clearly state the contrary. Interestingly, before the current Bankruptcy Code was passed in 1978, there was no bankruptcy statute which limited the ability to discharge student loans. Don’t be mistaken though: although it is indeed possible to discharge student loans in bankruptcy, it is by no means an easy thing to do. Debtors who plan on attempting to do so would be ill-advised to buy expensive automobiles beforehand – remember, Brunner talks about a minimal standard of living.

Restrictive as it may be, I agree with the participants from ABI’s podcast – it is a good thing that some form of discharge from student loans exists under the Bankruptcy Code. A test such as the one used in the Eighth Circuit would no doubt be more useful to the debtor in bankruptcy, but in the current economy, some form of discharge for student loans is essential. By this, I am speaking in part about the new wave of for-profit universities which do just at their name indicates – try to make a profit, which is necessarily at the expense of the students. Unfortunately, these students all too often find themselves in tremendous debt, with degrees in areas which are not overly marketable in the first place, and even less so in an economy with an 8.1% unemployment rate.

Please let me know what you think. I hope I was thorough enough to give a clear understanding as to how the undue hardship exception works. Next week, I’ll be writing about the ability to discharge medical malpractice debts, based largely off the Supreme Court’s 1998 decision of Kawaauhau v. Green. I promise I will talk about things besides discharge after that. Thanks for reading.

J.P.

Introduction

Thanks for taking the time to check out a blog whose topic probably seems boring and depressing to a lot of people. My goal here is to show that bankruptcy can actually be very practical and interesting, and for many people it instills a sense of relief, rather than depression.

Just to make it clear, I am an individual, not a bank. I am also a law student, in the summer before my 3L year at the Catholic University of America's Columbus School of Law in Washington, D.C. Unfortunately, I seem to be among the minority of students who have an interest in the topic of bankruptcy, but I have truly come to enjoy it as an academic and career interest; the other area of law in which I have substantial interest is the often-related field of tax law. 

My goal is to make this blog relatively devoid of legalese, and accessible to those without a knowledge of bankruptcy specifically, or law generally. The blog will not be carefully cited with footnotes throughout. I want to expose people generally to relevant, practical, and current topics having to do with bankruptcy, and show that it is worth the time to read about. Do I expect that many people will read this? Probably not. But at least I can try.

For those who do read this though, please keep in mind what I wrote above: I am a law student. I am not an attorney. Please do not substitute my writings for consultation with an attorney, which is a highly-advised course of action in the often complicated world of bankruptcy. I make no warranties as to the accuracy or completeness of the information provided, and no attorney-client or other relationship is being created, and I do not have the intent to plagiarize any information.  

With that being said, there are some very basic bankruptcy concepts that should be useful as you are reading. With only a few exceptions (such as determining state property law for exemptions from a bankruptcy estate), Bankruptcy Law is federal law. Article I, Section 8 of the Constitution lists the power of Congress to make "uniform Laws on the subject of Bankruptcies throughout the United States," as an enumerated power. The Bankruptcy Code is Title 11 of the United States Code, and contains several different Chapters; people often ask me what the different Chapters mean, often enough in fact that that is probably the most common aspect of bankruptcy law about which I am asked. 

Chapters 1, 3 and 5 are not mentioned in daily conversation as much as some of the latter Chapters, but they contain general information, instructions on case administration, and information on some of the parties to a bankruptcy case: the creditors and the debtor (the bankrupt person). Though it is difficult to pick out only a couple fundamental terms, I should mention that at the moment a debtor files for bankruptcy, all of his or her nonexempt property becomes part of a bankruptcy "estate," and an automatic stay is in place - creditors are instantly prohibited from attempting to collect on their debts. 

Chapter 7 is liquidation. This applies to both individuals and business entities. A business entity may end its operations, or an individual debtor may have the assets in his estate sold off to satisfy part of the debt owed to his or her creditors. It is, by far, the commonest form of bankruptcy.

Chapter 9 is municipal bankruptcy. I must confess that it is an area in which I know little, as it was not heavily discussed in my bankruptcy class, and I have not encountered it in my independent studying.

Chapter 11 is the form of bankruptcy that likely gets the most media attention - reorganization. This is often discussed in conjunction with the bankruptcies of major corporations (General Motors), and lately with several different Roman Catholic Dioceses. It can also be used by individuals, though - Mike Tyson filed for Chapter 11 in 2003. Here, I should mention that some people have come to me with the notion that all people who file for bankruptcy are "poor." This is not necessarily true; it just means that they are insolvent. Basically, this means one of two things: either their liabilities exceed their assets, or they are unable to pay their debts as they come due.

Chapter 12 is a relatively new Chapter which provides for debt adjustments for family farmers and family fisherman. It was made permanent in 2005 by the ultra-important Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). 

Chapter 13 provides for debt adjustment for individuals with regular income. It is not open to business entities. It is meant to be attractive to individuals in that a Chapter 13 debtor will get to keep her assets (her home, in particular), and will pay a portion of the debt off to her creditors over either a three- or five-year period, depending on the circumstances. BAPCPA further provides a "means test," in which debtors with a certain amount of income will be barred from proceeding under Chapter 7, and will instead have to use Chapter 13. The Bankruptcy Code has a preference for Chapter 13.

Chapter 15 is for cross-border cases. This is another area not covered at length in my bankruptcy class, but one I am studying independently at the moment. It is modeled after the United Nations Commission on International Trade Law (UNCITRAL) of 1997.

With the (very) basics out of the way, I plan on adding a new blog entry on a weekly basis. Those entries will, of course, have more specified topics than the current one. Next week I plan on writing about the ability to discharge student loan debt in bankruptcy, in which I hope many will take an interest. I was inspired about that topic because of a recent podcast I listened to from the American Bankruptcy Institute. 

So until next week (or whenever I decide to write again), thanks for reading, and please come back for more insolvency enlightenment!

J.P. Morgan