When patients declare bankruptcy: What happens to your unpaid bills?

Experts offer tips on what you can do, and how you can recognize when a patient might be headed for financial trouble.

By — Posted March 9, 2009

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The number of individuals filing for bankruptcy protection is rising, and so is the likelihood that one or more of those filers is a patient of yours. There were 679,982 Chapter 7 filings in fiscal year 2008, a 40% increase over the 484,164 filings in fiscal 2007, the U.S. Bankruptcy Court reported. Chapter 13 filings rose from 310,802 in 2007 to 353,828 in 2008, a 14% hike.

With Chapter 7 liquidation, most unsecured debt, including medical bills, usually are discharged. With Chapter 13 reorganization, you might get a portion of what is owed, but it could take years.

Receiving notice of a bankruptcy filing may make you want to aggressively pursue any money you can get, set stricter payment rules for that patient, or even fire him or her from your practice. Experts warn, however, that there are rules protecting debtors. Failing to know and follow those rules could leave you facing fines or other court sanctions.

Experts also call for some compassion. While you have the right to stop seeing any patient -- including one who has filed for bankruptcy -- that might not always be the best course. But if you follow proactive collection strategies for all of your patients, you can ensure any losses from bankruptcy won't have a major effect on your practice.

A bankruptcy petition is filed

As soon as you receive word that a patient has filed for bankruptcy -- whether through a formal letter from the court or attorney, or from the patient -- you must stop collection attempts for any bill incurred before that filing date, said Benjamin Geizhals, a Garden City, N.Y.-based health care attorney with Moritt Hock Hamroff & Horowitz.

You also must inform any collection agency you use to immediately stop calling the patient as well, said Carla DewBerry, a health care attorney with Garvey Schubert Barer in Seattle.

Attorneys say medical bills incurred before the filing date usually are discharged, meaning the court says the filer does not need to pay them. Any attempt to collect a discharged bill would put you in violation of a court order. An attempt to collect could result in thousands of dollars in court costs, attorney fees and punitive damages, according to Melissa Jacoby, a law professor with the University of North Carolina at Chapel Hill and fellow of the Bankruptcy Data Project at Harvard University.

"Doctors need to be mindful of saying, 'If you pay me that debt, I will trust you and continue to treat you,' " she said.

Experts say a patient in bankruptcy can volunteer to pay medical bills, but you cannot prod him or her to do so. "The patient needs to agree to it, and you need to prove that it was voluntary by the patient," DewBerry said.

The Internal Revenue Service doesn't offer any relief. Experts say the loss of revenue from a patient's bankruptcy cannot be written off on your taxes.

If your patient files for Chapter 7, your chances of seeing any payments from him or her are pretty much zero, experts say. About the only money available from a debtor during Chapter 7 comes from assets that can be seized and sold, but a primary residence and car often are exempted, which can leave little to sell.

You can, however, pursue any amount owed by the patient's insurance company.

A Chapter 13 bankruptcy enables those with regular income to develop a plan to repay all or part of their debts over three to five years. Payments are made to a trustee, who then distributes them to creditors.

"In Chapter 13, generally it is a goal to treat every creditor equally. If the debtor is in a repayment plan, doctor bills would be included along with the other debts. The court will be less likely to pick and choose," Jacoby said.

Physicians and other unsecured creditors who wish to receive distributions from a Chapter 13 bankruptcy estate, must file claims with the court within 90 days after attending an initial meeting of creditors with the trustee and debtor, according to U.S. Bankruptcy Court. After that meeting, the parties will come to court for a hearing on the debtor's repayment plan. However, priority claims -- government and secured debt -- are paid first.

Shannon Doyle, a consultant for the Medical Group Management Assn., said it is up to the physician to decide whether to attend these hearings. Given that the proceedings could be time-consuming and the bill may not be recouped anyway, in many cases it's not worth the time. And sometimes, the case is transferred to Chapter 7 because the debtor has no money to make payments under Chapter 13.

Protecting yourself

As the bankruptcy case winds through court, you can collect any bill for charges incurred after the filing. In a Chapter 7 proceeding, you can join other creditors in pursuing a reaffirmation agreement. That agreement says the debtor promises to pay what he or she owes, regardless of what comes out of bankruptcy court. Attorneys say in some instances you could ask your patients to sign this agreement if they want to continue seeing you.

But Paul Urich, a bankruptcy attorney in Orlando, Fla., said these agreements are usually for items the debtor wants to keep, such as a car or home, which are subject to being seized after a Chapter 7 case is completed. Urich said the debtor has 60 days to back out of the agreement, and in some areas, judges rarely approve a reaffirmation agreement for an unsecured debt.

It's better, experts say, to take steps to ensure you will get paid from the patient in the future. DewBerry suggests putting a patient who has filed bankruptcy on a payment plan and a watch list. If the patient has problems paying your bills, implement whatever policy you have for any non-payer, including firing. "But be sure you have a policy in place," she said.

And be aware that firing a patient could have legal and ethical repercussions. Dismissing a patient without a plan of care for the future could result in charges of abandonment, Geizhals said.

Also, Doyle said, if you started a treatment plan before the patient filed bankruptcy, you may be obligated to continue it.

The AMA says physicians have the right to stop seeing a patient, but they must first give notice to the patient, or the patient's caregivers, and allow sufficient time for another source of medical care to be arranged. The AMA's ethical code also says each doctor has an obligation to share in providing care to the indigent.

Even if you sustained a significant financial loss due to the bankruptcy filing, Doyle said if the patient has been with your practice for a long time and has always paid the bills, you may want to continue seeing him or her.

On the other hand, if the patient regularly was poor about paying, Doyle said, discharging him or her might be appropriate. He recommends sending the patient a letter stating you are firing him or her because of the history of nonpayment, without specifically mentioning the bankruptcy.

Stop trouble before it starts

Experts say it is not always easy to tell if someone is on the verge of filing for bankruptcy. "Some are current on their debts, yet file for bankruptcy. Others are late and will continue to pay over time," said Leslie Berkoff, a bankruptcy lawyer with Moritt Hock Hamroff & Horowitz in New York. But there are several steps physicians can take to protect themselves, Doyle said. He encourages doctors to do timely follow-ups with insurance plans to make sure patients are still insured and to learn the patient's deductible or co-pay so that amount can be collected at the time of service.

Jacoby said doctors also can do credit checks on a patient through a credit reporting agency. Information provided will include whether a person has filed bankruptcy or has a history of paying bills late.

But the experts agree that having a patient go bankrupt doesn't have to be an all-bad thing. In fact, they say a patient who has filed for bankruptcy may be one of the lesser risks in the future, given they can't file again for eight years.

"Just because a person files bankruptcy once doesn't mean they will be a problem payer in the future. From a doctor's perspective, this patient will now focus on more important things -- like medical care and housing," Jacoby said.

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An upward trend

The number of personal bankruptcies filed in federal courts is moving back up after dropping significantly following the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made it more difficult to dispose of debts. With soaring unemployment and rising debt, bankruptcy attorneys say, filings could get back to pre-act numbers.

Bankruptcy filings
Chapter 7
Chapter 13
2005 1,346,201 429,316
2006 833,147 272,937
2007 484,162 310,802
2008 679,982 353,828

Source: U.S. Courts, "Bankruptcy Filings Over One Million for Fiscal Year 2008" (link)

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Different options

Chapter 7

  • A bankruptcy trustee liquidates the debtor's nonexempt assets and distributes the proceeds to creditors. State law often determines whether a property is exempt from liquidation. The debtor has no liability for discharged debts.
  • Chances of a medical practice getting money from asset liquidation are slim, bankruptcy attorneys say. Unsecured debts, such as medical bills, are reimbursed after government and secured debt. Secured debt is that which has collateral.
  • When a Chapter 7 petition is filed, most collection actions against the debtor are automatically stayed or stopped. As long as the stay is in effect, creditors may not initiate or continue lawsuits, wage garnishments or telephone calls demanding payments. All creditors whose names and addresses are provided by the debtor are given notice of the filing.
  • If a debtor wants to keep certain secured property or pay a certain debt, he or she can sign a reaffirmation agreement with the creditor. Attorneys say the agreements seldom include medical debt.

Chapter 13

  • Called a "wage earner's plan," individuals with regular incomes develop a plan to repay all or part of their debt over 3 to 5 years. Unlike Chapter 7, it allows filers to keep their house and reschedule secured debts over the life of the chapter's plan. It acts like a consolidation loan under which the debtor makes payments to a Chapter 13 trustee, who then distributes payments to creditors.
  • Filing Chapter 13 automatically stays most collection actions against the debtor and any co-debtors.
  • To receive distributions, unsecured creditors, such as medical practices, must file their claims with the court within 90 days after an initial creditors meeting. However, unsecured creditors are not necessarily paid in full. They get as much as they would if the debtor's assets were liquidated under Chapter 7.

Sources: U.S. Bankruptcy Courts; Paul Ulrich, bankruptcy attorney in Orlando, Fla.; Carla DewBerry, health care attorney in Seattle

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Warning signs of patient bankruptcy

Medical practices will want to keep an eye out for clues indicating that a patient is about to file bankruptcy.

Check problems: Checks start bouncing, or the patient asks if he or she can postdate them. A less obvious warning sign is a check dated several weeks before you receive it. This indicates the patient waited until he or she was sure there was sufficient money in the bank to cover it.

No more credit: The credit card is denied, meaning that the patient probably has reached the card's credit limit.

Abrupt changes in the pattern of payment: Customers who usually pay their bills on the day of service are now making partial payments, are consistently late in making copayments or aren't making any payment at all.

Change in payment plan schedule: A patient suddenly starts falling behind on a scheduled payment plan for accounts already past due.

A pattern of nonpayment: A review of a patient's credit report, available at a cost from the major credit reporting agencies, reveals that the patient is late in paying other bills as well, including credit card statements and mortgage.

Change in visits: The patient begins to cancel or fails to show for appointments. When called to reschedule, the patient may make excuses as to why he or she or a family member can't come any time soon.

No one at home: Calls to the patient's home from the practice and collection agencies are unanswered, or the caller is told the owing patient is not at home. Mail is returned to the office.

No phone: The patient's phone is disconnected.

Sources: Shannon Doyle, MGMA consultant; Benjamin Geizhals and Leslie Berkoff, attorneys with New York-based Moritt Hock Hamroff & Horowitz; Melissa Jacoby, law professor at University of North Carolina at Chapel Hill and fellow of Bankruptcy Data Project at Harvard University

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External links

U.S. Courts, Chapter 7 bankruptcy basics (link)

U.S. Courts, Chapter 13 bankruptcy basics (link)

"Trade-Offs Getting Tougher: Problems Paying Medical Bills Increase for U.S. Families, 2003-2007," Center for Studying Health System Change tracking report, September 2008 (link)

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