Sick Over Defaults and Filing for Bankruptcy

While Senate Bill 61, which may provide bankruptcy judges the ability to modify mortgage agreement, remains stuck in committee, the relationship of bankruptcy to mortgage default remains a hot issue. The “Helping Families Save Their Homes in Bankruptcy Act 2009” aims to protect borrowers who are recently made bankrupt. But what exactly would make a family need to file for this protection in the first place? And what do these families look like? Help finding an answer may be in a place most of us wouldn’t think to look: the August 2009 issue of the American Journal of Medicine. In the medical journal is a research report on the first-ever national random-sample survey of bankruptcy filers. And the results are interesting, to say the least. Illnesses and medical bills are contributing to a large and increasing share of bankruptcies, according to the survey. Before the current economic downturn, an American family filed for bankruptcy in the aftermath of illness every 90 seconds; three-quarters of them were insured. Now, more than 60% of all bankruptcies in the United States are driven by medical incidents. A five-state study in 2001, by way of comparison, found medical problems contributed to 46.2% of all bankruptcies. The current results come from researchers at Cambridge Hospital, Harvard Medical School, Harvard Law School and Ohio University who surveyed a random national sample of 2,314 bankruptcy filers in 2007, abstracted their court records, and interviewed 1,032 of them. For research purposes, the designated bankruptcies as “medical” based on debtors’ stated reasons for filing, income loss due to illness and the magnitude of their medical debts. Using identical definitions in 2001 and 2007, the share of bankruptcies attributable to medical problems rose by a ratio of 49.6%. The odds that a bankruptcy had a medical cause were 2.38 fold higher in 2007 than in 2001. According to a release on the study, a number of circumstances propelled many middle-class, insured Americans into bankruptcy. For 92% of the medically bankrupt, high medical bills directly contributed to their bankruptcy. Many families with continuous coverage found themselves under-insured, responsible for thousands of dollars in out-of-pocket costs. Out-of-pocket medical costs averaged $17,943 for all medically bankrupt families: $26,971 for uninsured patients; $17,749 for those with private insurance at the outset; $14,633 for those with Medicaid; $12,021 for those with Medicare; and $6,545 for those with VA/military coverage. For patients who initially had private coverage but lost it, the family’s out-of-pocket expenses averaged $22,568. So what does this mean to housing? Because almost all insurance is linked to employment, a medical event can trigger loss of coverage. Furthermore, today’s coverage shows unemployment on the rise, up to 9.4%. Nationally, a quarter of firms cancel coverage immediately when an employee suffers a disabling illness; another quarter does so within a year. Income loss due to illness was also common, but nearly always coupled with high medical bills. Writing in the article, Dr. David Himmelstein, states, “The US health care financing system is broken, and not only for the poor and uninsured. Middle class families frequently collapse under the strain of a health care system that treats physical wounds, but often inflicts fiscal ones.” Loss of employment + hefty medical bills = bankruptcy. And, if some Senators get their way, bankruptcy may soon equal mortgage cramdown.