The new bankruptcy law could sink families with big medical bills
By: Source: AARP Bulletin Today Date Posted: June 2005
Severe health problems forced Joyce Johnson into early retirement 10 years ago. Money problems from crushing medical debt forced her into bankruptcy last year.
"I’d always worked an extra six hours a day, and I worked on Saturdays, with the goal that I’d retire by 65 with enough money to be comfortable," says Johnson, 60, a former secretary who shares her home with one of her three grown children in Fort Worth, Texas. "But it hasn’t worked out that way."
Even with health insurance, Johnson’s medical bills for gall bladder surgery, kidney disease and other ailments climbed to $38,000, enough to eat up the savings she had painstakingly built up for her retirement during years of working.
According to a recent Harvard study, Johnson is the new face of the typical American driven into bankruptcy by mounting medical debt: middle-income, privately insured and hard-working.
Nearly half of the estimated 1.5 million personal bankruptcies filed each year result from high health expenses—even though 76 percent of the filers are covered by insurance at the onset of illness, researchers reported in Health Affairs in February.
"Almost every American is one step away from potential bankruptcy from serious illness," says David Himmelstein, an associate professor of medicine at Harvard Medical School who led the study.
A controversial bankruptcy law Congress enacted last month makes it tougher for many Americans to wipe out debt by declaring bankruptcy, regardless of whether their debt resulted from medical bills or from reckless spending at the mall.
Under the old law, people who filed for bankruptcy under Chapter 7 were allowed to erase their debt and start fresh. The new measure makes it less likely that debtors—particularly those who earn more than their state’s median income level—will qualify for Chapter 7. Instead, they will have to file under Chapter 13, which requires paying off some or all debt over a designated period of time.
Filers must then go through a "means test" to determine how much debt, if any, they can pay. They must also get credit counseling and take a financial management course at their own expense.
Supporters of the law—retailers, banks and other credit issuers—say such stringent reforms were long overdue to correct a system that enabled "deadbeats" to dodge their financial obligations. Sen. Charles Grassley, R-Iowa, who sponsored the bill, says the reforms will force consumers "who have the means" to pay their debt.
But critics say the law gives a break to the well-off through a loophole that exempts money sheltered in asset protection trusts while raising the bar for others overwhelmed by bills and loans because of job layoffs, divorce or illness.
Most people will have trouble getting out from under their debt, says Travis Plunkett, legislative director for Consumer Federation of America. "This [law] will snare a lot of well-meaning people who are in bankruptcy because they’ve suffered a financial misfortune."
A study funded by the nonprofit American Bankruptcy Institute found that under the new measure an estimated 40,000 people will be denied the right to file under Chapter 7. Credit issuers estimate more than twice that number.
ABI resident scholar Jeff Morris says that historically, two-thirds of those who voluntarily file under Chapter 13 fail to pay off their debt completely. If filers have no other option, he says, "it’s even less likely that they will complete their payment plans."
Elizabeth Warren, a Harvard law professor who took part in the medical bankruptcy study, says middle-income families are vulnerable because it’s nearly impossible for them to survive financially in our health care system. Insurance policies have so many gaps in coverage, she says, that patients’ out-of-pocket medical expenses often skyrocket.
"It doesn’t take a catastrophic illness to have a catastrophic financial effect," says Warren, co-author of The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke. "Today it’s possible to run up a $10,000 medical bill before you’re dismissed from the ER."
Joyce Johnson knows just how fast medical expenses add up. She chose to file under Chapter 13, which allowed her to keep her home and car. Some of her debt was forgiven, but she’s not out of the woods yet. She has given up her cell phone, her newspaper subscription and, now, her car.
"It’s hard enough fighting a life-threatening disease day to day," says Johnson, tired from an afternoon dialysis treatment. "Then you have to worry about it financially. The stress of the bills just gets to you."
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