Health Insurance and Bankruptcy

Law Office of Robert L. Firth April 26, 2021

Having health insurance is extremely important. Both Chapter 7 and Chapter 13 bankruptcy can help you get and keep your health insurance.

Last week we discussed the 6 months of free health insurance provided by the recent American Rescue Plan Act. It may apply to you if you lost your job and your health insurance with it. If this applies to you please check out that blog post.

Today’s blog post gets into the broader topic of health insurance and bankruptcy.

There’s lots of evidence “that medical bills are the single largest causal factor in consumer bankruptcy.” Medical Debt as a Cause of Consumer Bankruptcy. Studies have been showing this for many years.

What may be more surprising is that most people who file bankruptcy have health insurance at the time of filing. According to one study nearly 70% of personal bankruptcy filers had health insurance. Medical Bankruptcy in the United States, The American Journal of Medicine.

More to the point, virtually the same percentage applies even for those who file “medical bankruptcy” cases. Think about it. Nearly 70% of people who file bankruptcy giving medical bills or illness as specific reasons for filing had health insurance. They had to file bankruptcy for medical reasons even though they had health insurance. They needed legal financial relief even though they had insurance that presumably covered much of their healthcare costs.

So, if you are contemplating bankruptcy even though you have health insurance, you are certainly not alone.

So today we answer questions about bankruptcy and your health insurance.

Can Bankruptcy Help Me Prioritize Health Insurance?

Do you not have health insurance now because you can’t afford the monthly premiums? Bankruptcy could “discharge” (legally write off) your debts so that you could more likely afford the insurance.

You know it’s really important to have health insurance. People tend to put off preventative medical care when they don’t have insurance. So it’s unhealthy not to have insurance.

If you don’t have insurance your medical bills are significantly larger because you’re charged more. That’s because medical providers agree to reduced “allowed” amounts with insurance companies for most medical services. Plus of course if you wait until your condition is worse that is often both unhealthy and much more expensive.

On top of everything else, you’ll likely have difficulty getting the medical services you need if you don’t have insurance. It’s true that “due to federal law, hospitals are required to provide emergency treatment on credit.” “And in most cases [they] provide nonemergency care without an upfront payment as well.” Bankruptcy as Implicit Health Insurance, p. 1, National Bureau of Economic Research. Nevertheless, practically speaking it’s difficult to establish an ongoing relationship with a general practitioner, much less any needed medical specialists, under these circumstances. So again, your health suffers.

Clearly, health insurance is super important. It has to be among your very highest priorities. Both “chapters” of consumer bankruptcy—Chapter 7 and 13—enable you to prioritize this need.

How Could Chapter 7 “Straight Bankruptcy” Help?

Chapter 7 is a relatively quick procedure for discharging all or most of your debts. The minute you file you can stop paying all or most of your debts. This includes both voluntary payments and involuntary ones like wage and bank garnishments. So your monthly cash flow usually improves right away. This frees up money for your high-priority expenses, like health insurance.

This can be particularly helpful if you’ve been putting off medical (and/or dental) procedures while you’ve been without health insurance. You can discharge your debts now so that you can afford this essential expense in the coming months and years. You’d also be better able to pay for that portion of medical expenses—co-pays and deductibles—not covered by insurance.

If you have insurance now but without very good coverage, filing bankruptcy now may enable you to get better coverage. This would especially make sense if you anticipate relatively high upcoming medical expenses. You’d be getting a fresh financial start now while lowering out-of-pocket medical costs into the future.

Lastly, Chapter 7 empowers you to deal wisely with all kinds of anticipated changes in your financial circumstances. For example, the free health insurance premiums referred to in the first paragraph runs out as of the end of September 2021. If you happen to qualify, filing bankruptcy now could enable you to afford the premiums once this free period expires.

How Could Chapter 13 “Adjustment of Debts” Help?

Chapter 13 is different because it’s not quick: it involves a 3-to-5-year payment plan. You get protection from creditors’ collection efforts right away just like under Chapter 7. But then you essentially pay whatever you can afford each month. Often most of what you pay goes to certain high-priority debts, and other debts get little, or sometimes even nothing.

The good news is that you usually get to pay your health insurance premium ahead of your creditors. In determining how much you pay “into the plan” each month to your creditors, you get to subtract your reasonable living expenses. Bankruptcy law treats health insurance premiums as a necessary and reasonable expense for this purpose.

Also, future out-of-pocket medical expenses (beyond the monthly premiums) are also considered reasonable expenses. So your bankruptcy lawyer will include an estimated monthly amount for such medical expenses. Again, you can pay these out-of-pocket medical expenses ahead of paying the creditors in your payment plan.

Furthermore, if your after-filing medical expenses increase beyond the amount initially budgeted, you could change (“amend”) your Chapter 13 plan. You’d show that your medical expenses have gone up. This would lower your Chapter 13 plan payment amount, and possibly extend the plan’s length.