Originally published in the San Antonio Express-news, April 17, 2005
by Susan Ives

My husband and I are unlikely to declare bankruptcy. We own our home, free and clear. Our 10-year-old cars are still running fine, thank you very much. The credit cards are used strictly for convenience: they’re paid in full, every penny, every month. We live frugally, save conscientiously and are blessed with a good health plan.

We’re poster geezers for personal responsibility. Unless one of us gets sick.

According to a joint study conducted by researchers at the Harvard law and medical schools and recently published in the journal Health Affairs, illness and medical bills contributed to half of the personal bankruptcies in 2001.

More than three-quarters were insured at the start of their illness but 38 percent lost coverage by the time they filed for bankruptcy. Uncovered medical bills averaged $13,460 for those with insurance at the start of their illness. Cancer patients had average medical debts of $35,878.

Most medical bankruptcy filers were middle class: they owned a home and attended college. Illness forced many breadwinners to stop working-losing income and insurance when their families needed it most.

Dr. David Himmelstein, the lead author of the study, remarked: “Unless you’re Bill Gates you’re just one serious illness away from bankruptcy. Most of the medically bankrupt were average Americans who happened to get sick.”

Perhaps Congress could do something about the 1.6 million families and small businesses that filed for bankruptcy last year. Like comprehensive federal medical insurance. Or capping usurious interest rates. Better consumer education.

Well, Congress is doing something. They’re toughening the bankruptcy law. It’s already passed the Senate and was expected to skate though the House last week.

The new law will make it tougher to file under Chapter 7, the method that gives the debtor a clean slate. Rather than give the courts discretion in evaluating individual cases, it will impose an inflexible means test. Those making more than their state’s median income ($54,554 in Texas) will be required to file under the more stringent Chapter 13.

Among the provisions in the 300-plus page bill is a change to the homestead exemption enjoyed in Texas and Florida. It will be restricted to $125,000 if the home was bought less than three years and four months before filing.

Under current law, child support and alimony cannot be written off: they take precedence over other debts. Under the new law, claims to back child support and alimony will be on equal footing with the claims of credit-card companies.

If you’re rich, though, don’t worry. The bill preserves the “millionaire’s loophole,” which allows the wealthy to establish asset protection trusts. Five states – Alaska, Delaware, Nevada, Rhode Island and Utah – exempt such trusts from the federal bankruptcy code. Trust holders do not have to live in one of the five states; they need only open their trust in an institution there.

The Senate, though, rejected amendments that would have protected those bankrupted by a medical emergency, identity theft, caregiver expenses or income loss due to being called to full-time military duty in the National Guard or Reserve. People like you and me.

The logic behind this bill is to put a stop to bankruptcy abuse: people who run up charges on luxury goods, then weasel out of their just debts, laughing all the way to the BMW dealership for their next round of wanton spending.

In reality, more than 90 percent of personal bankruptcies are rooted in catastrophe: illness, job loss or divorce. Even the financial industry only claims a three percent abuse rate. But hey: they wrote the law, they get their pound of flesh and their millionaire buddies are allowed to hide their money in Utah. Personal responsibility for me, but not for thee.

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