The Medical Bankruptcy Fairness Act of 2008

This bill, introduced by Representative Carol Shea-Porter (D-NH), would increase the Federal Homestead Exemption in Bankruptcy to $250,000 for “medically distressed debtors”.  The bill also prohibits trustees in such instances from dismissing a case or converting to Chapter 13 based on the substantial abuse provision of 707(b) of Title ll.  A medically distressed debtor is defined as a debtor in bankruptcy who has spent more than 25% of annual income on unreimbursed medical expenses or has lost more than four weeks of work due to the debtor’s or a relative’s illness.

Increasing the homestead exemption would be a boon to people in this situation who have managed to retain significant home equity through a medical crisis.  It will not help those who have resorted to second mortgages and home equity lines of credit, which is probably more typical.  These people can still lose their homes as a result of the illness.

The Bill introduces the useful concept of an “economically distressed caregiver”, that is, the person who income and work opportunities are limited because of assistance provided to a sick relative. The term “relative” is not defined.  In student loan hardship discharge cases, which admittedly have much more draconian provisions than means testing for Chapter 7 eligibility, care provided to anyone for whom there is no legal obligation – for an adult child, sibling, niece or nephew, for example doesn’t count.  Be prepared for the same arguments in a medical bankruptcy setting.

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