Bankruptcy Reform and the Medical Myth
Its name is as long as its history, and it looks ready to become law.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 recently passed the U.S. Senate. It is now likely to pass the House of Representatives. From that point, we can be pretty certain that President Bush will sign it into law. Thus major reform will sweep through the U.S. bankruptcy system for the first time in many years.
Highlights of the legislation
The centerpiece of the BAPCPA is its restriction on who may qualify for Chapter 7 bankruptcy, in which most debts may be fully erased once certain assets are liquidated.
Under the new law (which is nothing if not controversial), if the bankruptcy petitioner passes a mandated "means test" and earns more than his or her state's median income, and is judged to be able to repay at least $6,000 over five years, then that petitioner will likely be directed into Chapter 13 bankruptcy. There, debts are not fully erased, nor are assets fully liquidated. Rather, the consumer's ongoing expenses are scrutinized with the court and related parties creating payment plans to allow for at least some repayment of debts.
Among other items, the bill also mandates that consumers who seek bankruptcy must pay for and undergo credit counseling within 180 days of filing. They also must complete a personal financial management instructional course.
A few lender reforms dot the bill's landscape, but these changes pale in comparison to those imposed on borrowers. Several senators sought to cap lenders' punitive rates-those interest rates imposed by lenders on less-than-pristine borrowers-at a maximum of 30 percent. Such attempts were thwarted.
The medical myth
You probably read about it recently: A Harvard University study purported that over half of all American bankruptcy filers do so because of medical expenses. Popular media (and many high-profile financial experts) have taken the findings almost as gospel. They assert that such a report describes exactly why bankruptcy reform in general, and the BAPCPA in particular, is such a punishment to hard-working consumers-and a profit-laden gift to credit card issuers, banks and other lenders.
But the Harvard study, entitled Illness and Injuries as Contributors to Bankruptcies, is noteworthy not so much for its findings as for its questionable boundaries.
And just what defined a major medical bankruptcy for the researchers? Try any petitioner who 1) cited illness or injury as a specific reason for bankruptcy, or 2) lost at least two weeks of work-related income due to illness or injury, or 3) mortgaged a home to pay medical bills or 4) reported uncovered medical bills exceeding $1,000 in the past two years. How's that for a broad brush?
Let's explore, shall we?
In the study, a family might have had $30,000 in credit card debt, $25,000 in auto loans and $15,000 in student loans. But since they encountered unreim-bursed medical bills of $2,000 (a birth, perhaps) in the two years before their bankruptcy filing, they were judged to be a "medical bankruptcy." This is blatantly misleading, if not downright biased!
It wasn't the $2,000 in recent medical bills that landed that family in financial straits; it was the relentless accumulation of debt in general over years and years.
All debt we know (or should know), is risky. "It is a bet," wrote Carolyn Bigda and Megan Johnston in a recent issue of Money magazine, "an implicit wager that you'll have money later to pay for all the crap you're buying now that you can't afford."
The chronology of the debt is immaterial. This is worth repeating: The chronology of the debt is immaterial. All debt is a risk upon the future, no matter when it is incurred.
Meet Jane Doe
Let's consider a real-life Chapter 7 scenario from one southern state's bankruptcy files-records which are public and easily found on the Internet.
In this 2004 case, petitioner Jane Doe listed assets of almost $250,000. She was seeking relief from secured debts of over $519,000 (mortgage, cars, etc.), and over $185,000 of unsecured debts. Of this latter amount, $5,650 represented medically-related debt incurred since 2002. Jane Doe easily falls within the Harvard study's designated blanket for "Major Medical Bankruptcy."
Deeper viewing of Ms. Doe's court documents shows exactly why the oft-cited Harvard study is so misleading.
The medical debt accounted for a mere 3.1 percent of Ms. Doe's total unsecured debt. She listed $65,500 of credit card debt and $31,400 in personal and signature loans.
Obviously, it is not inconceivable that some of this credit-card and personal debt arose from medical issues. Yet we should also note that Ms. Doe was apparently content to sign up for three Book Clubs, which by 2003 added another $1,050 to her debt load-when she had already rung up $14,300 of various debts from 2002 and earlier.
Look inside those debts, and you find $500 in checking overdraft fees, $3,500 in cell phone bills, $1000 for tag, tax, and title on a purchased vehicle and a $50 medical bill from 1987!
It is painfully obvious that something besides "medically-related debt" was going on here. (It is worth noting that Ms. Doe's income for 2003 or 2004 was sufficient to deny Chapter 7 and require a Chapter 13 bankruptcy, according to the BAPCPA's suggested means test.)
Keep a proper perspective
Think about the figures above when you hear railings against bankruptcy reform from those who cite the Harvard study (or any other). Endless recitations of studies asserting that "half of consumer bankruptcies are medical-expense related," or some such thing, must be viewed with skepticism.
Ours is a nation constructed upon debt of all varieties. American life and the "American Dream" are expensive.
To achieve them, citizens are practically programmed to rely upon debt at all levels.
In the end, the overriding cause of bankruptcy is much simpler: Consumer bankruptcies are caused by debt. Such debt may take many forms-medical, legal, tax, credit card, payday advance, or whatever. But it is debt nonetheless. Such debt may by incurred for any of thousands of reasons. Some of them unavoidable but most of them are not. Most are a choice to trade the possible needs of the future for the wants of the present.
Again, we should remember: All debt is a risk upon the future, no matter when or why it is incurred. That is why the reduction of debt at all points in our lives is so vastly important. That is why we must do everything we can to assure that we-and those closest to us-fully understand the nature of debt, its benefits and the awesome risks it imposes. And it is why we must fully understand the changes about to take place in our bankruptcy system.
Learn more about the BAPCPA at the American Bankruptcy Institute's web site: www.abiworld.org/pdfs/s256/CRS-S256.pdf. Further details regarding the Harvard study, Illness and Injury as Contributors To Bankruptcy are at http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.63/DC1.
Michael Milner is a the creator and editor of "It's Your Money," www.moneyspot.org, and lives in Oklahoma.
Originally published June 14, 2005.
