Personal Bankruptcies Spike

Non-business bankruptcies in Fiscal Year 2010 (ending September 30) totaled 1,538,033, up 14.4 percent from the 1,344,095 in the previous year. This is the highest number since FY 2005, immediately prior to implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act.

Overall, FY 2010 bankruptcies totaled 1,596,355, up 13.8 percent over total FY 2009 bankruptcy filings of 1,402,816. While non-business bankruptcy filings continued to rise in FY 2010, business bankruptcies were down 0.7 percent to 58,322, from 58,721 in the previous (fiscal) year.

Statistics are from the Administrative Office of the Courts. The bankruptcies reported here are for October 1, 2009 through September 30, 2010.

U.S. Supreme Court Decides Milavetz, Gallop & Milavetz, P.A., v. United States

Bankruptcy law doesn't restrict free speech, Supreme Court says
By Robert Barnes
Washington Post Staff Writer
Tuesday, March 9, 2010

A federal law that bars attorneys from telling clients who are contemplating bankruptcy to take on more debt is not an unconstitutional restriction on the free-speech rights of lawyers, the Supreme Court decided Monday.

Attorneys may give their clients any advice that does not lead to an abuse of the bankruptcy system, the court ruled unanimously in an opinion written by Justice Sonia Sotomayor.

A small Minnesota law firm had challenged the provision in Congress's broad 2005 bankruptcy overhaul law. The firm's lawyer had told the justices that incurring more debt might sometimes be the prudent thing to do to help the individual and creditors. And, he said, more troubling was the law's potential conflict with the First Amendment and a lawyer's responsibility to give "unfettered, candid advice."

But the court, skeptical of the arguments when it heard the case in December, said, in effect, there was no reason to make a constitutional case out of it. The law could be read narrowly, Sotomayor wrote, and she agreed that sometimes that meant it would be wise to take on more debt.

For instance, she said in a footnote, "Advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor's interest rates or improve his ability to repay is not prohibited."


She added: "It would make scant sense to prevent attorneys and other debt relief agencies from advising individuals thinking of filing for bankruptcy about options that would be beneficial to both those individuals and their creditors."

The U.S. Court of Appeals for the 8th Circuit (in St. Louis) ruled in 2008 that the provision was unconstitutional.

But Sotomayor was among those skeptical when the case came before the justices.

Perhaps the law only reinforces rules prohibiting lawyers from giving their clients unethical advice, she suggested.

"What in the First Amendment would otherwise give you that right?" she asked the law firm's lawyer.

Medical Bankruptcy Exaggerators Persist

It appears that the American Journal of Medicine and New York Times columnist Nicholas Kristof remain unchastened, or at least undeterred, by the debunking (posted here July 27) of 2005 claims that half of all bankruptcies are occasioned by large medical bills. Kristof and the Journal now assert that the true number is 62 percent, and that the rate of medical bankruptcy has increased by 50 percent since 2003.

One hopes that there will be a prompt response to these statistical claims, either by Linda Gorman (debunker of the 2005 claim) or someone similarly steeped in statistical methodology. If the Journal's claim is sound, it should be reflected in policy. If it is hogwash, the Journal - and Kristof - should be confronted. http://www.nytimes.com/2009/08/30/opinion/30kristof.html

Until Medical Bills Do Us Part
by Nicholas D. Kristof
New York Times

Critics fret that health care reform would undermine American family values, not least by convening somber death panels to wheel away Grandma as if she were Old Yeller. But peel away the emotions and fearmongering, and in fact it is the existing system that unnecessarily takes lives and breaks apart families.

My friend M. — you’ll understand in a moment why she’s terrified of my using her name — had to make a searing decision a year ago. She was married to a sweet, gentle man whom she loved, but who had become increasingly absent-minded. Finally, he was diagnosed with early-onset dementia.

The disease is degenerative, and he will become steadily less able to care for himself. At some point, as his medical needs multiply, he will probably need to be institutionalized.

The hospital arranged a conference call with a social worker, who outlined how the dementia and its financial toll on the family would progress, and then added, out of the blue: “Maybe you should divorce.”

“I was blown away,” M. told me. But, she said, the hospital staff members explained that they had seen it all before, many times. If M.’s husband required long-term care, the costs would be catastrophic even for a middle-class family with savings.

Eventually, after the expenses whittled away their combined assets, her husband could go on Medicaid — but by then their children’s nest egg would be gone, along with her 401(k) plan. She would face a bleak retirement with neither her husband nor her savings.

A complicating factor was that this was a second marriage. M.’s first husband had died, leaving an inheritance that he had intended for their children. She and her second husband had a prenuptial agreement, but that would not protect her assets from his medical expenses.

The hospital told M. not to waste time in dissolving the marriage. For five years after any divorce, her assets could be seized — precisely because the government knows that people sometimes divorce husbands or wives to escape their medical bills.

“How could I divorce him? I loved him,” she told me.

“I explored a lot of options with an attorney here in town,” she added. “The attorney said, ‘I don’t see any other options for you.’ It took about a year for me to do the divorce, it was so hard.”

So M. divorced the man she loves. I asked him what he thought of this. He can still speak, albeit not always coherently, and he paused a long, long time. All he could manage was: “It’s hard to say.”

Long-term care constitutes a difficult and expensive challenge in any health system. But the American patchwork, full of cracks through which people fall, has a special problem with medical expenses of all kinds bankrupting couples.

A study reported in The American Journal of Medicine this month found that 62 percent of American bankruptcies are linked to medical bills. These medical bankruptcies had increased nearly 50 percent in just six years. Astonishingly, 78 percent of these people actually had health insurance, but the gaps and inadequacies left them unprotected when they were hit by devastating bills.

M. still helps her husband and, quietly, continues to live with him and care for him. But she worries that the authorities will come after her if they realize that they divorced not because of irreconcilable differences but because of irreconcilable medical bills. There were awkward questions from friends who saw the divorce announcement in the newspaper.

“It’s just crazy,” she said. “It twists people like pretzels.”

The existing system doesn’t just break up families, it also costs lives. A 2004 study by the Institute of Medicine, a branch of the National Academy of Sciences, found that lack of health insurance causes 18,000 unnecessary deaths a year. That’s one person slipping through the cracks and dying every half an hour.

In short, it’s a good bet that our existing dysfunctional health system knocks off far more people than an army of “death panels” could — even if they existed, worked 24/7 and got around in a fleet of black helicopters.

So, for those of you inclined to believe the worst about President Obama, think it through. Suppose he is indeed a secret, foreign-born Muslim agent who is scheming to undermine American family values while killing off as many grandmothers as possible.

If all that were true, why on earth would he be trying so hard to reform our health care system? We already know how to prod families into divorce and take a life unnecessarily every 30 minutes — all we need to do is reject reform and stick with exactly what we have.

Pros y Contras de la Bancarrota

Bancarrota: ¿Alivio o Error?
Las Reglas para Declararse en Quiebra
Julia Suarez, Univision Online

Cada año más de un millón de estadounidenses se declara en bancarrota. Sin embargo, la legislación que entró en vigor en 2005 cambió las cosas: acogerse a este recurso para acabar con las deudas ya no es tan fácil.

¿Qué es la bancarrota?

Son millones los estadounidenses que se sienten cada año ahogados por las deudas, para ellos declararse en bancarrota es la única salida de una situación insostenible y sin escapatoria.

Aunque esta opción mancha el historial de crédito, para muchos es la única solución.

Existe un porcentaje elevado de personas que optan por este recurso llevados por publicidad engañosa que no explica claramente qué involucra un proceso de bancarrota.

En muchos casos no se han explorado todas las posibilidades de refinanciar la deuda. La Asociación Americana de Servicios Financieros (American Financial Services Association) recomienda consultar con expertos antes de tomar una decisión.

Sin embargo, en situaciones de desempleo o de una deuda que excede la capacidad de pago lo más probable es que se vea obligado a recurrir a la quiebra.

Este engorroso proceso legal puede afectar el crédito durante varios años, pero también significa un punto final al angustiante peso de una deuda impagable.

Are Half of All Bankruptcies Medical?

Is it really true that half of all consumer bankruptcies result from catastrophic medical expenses? Not according to Linda Gorman, who posted on the subject on John Goodman's Health Policy Blog in 2008. Gorman traces the idea back to a 2005 Health Affairs article based on questionable methodology.

Medical Bankruptcy Myths
by Linda Gorman

The idea that half of all bankruptcies are caused by medical debt has become part of the common folklore. But where did the idea come from? What is the evidence for it? The claim, first made in a 2005 Health Affairs article, is at variance with four decades of economic research, including a finding that even large medical bills have no impact on family living standards.

The paper by David Himmelstein, Elizabeth Warren, Deborah Thorne, and Steffie Woolhandler was published as a Health Affairs web exclusive on February 5, 2005. The authors are strong proponents of government run health care.

The data comes from 1,250 personal bankruptcy cases, assumed to be representative of the almost 1.5 million households that filed for bankruptcy in 2001. The data on each bankruptcy were abstracted from court records and supplemented with 931 telephone interviews. The paper's conclusions about illnesses in households were based on medical interviews conducted with 391 people. The paper does not specify how those people were selected. It does say that Himmelstein and Woolhandler (H & W), both MDs, coded the diagnoses given by debtors into the categories used for the analysis.

The classifications used to determine a medical bankruptcy were odd. Only 28.3 percent of the sample cited self-reported illness or injury as a cause of bankruptcy. However, H & W managed to almost double that figure (to 54.5 percent) by counting the following as "illnesses":

•1. A birth or addition of a new family member
•2. A death in a family
•3. A drug or alcohol addiction
•4. Uncontrolled gambling
•5. Loss of at least 2 weeks of work-related income due to illness or injury by anyone in the household
•6. Out-of-pocket medical bills of $1,000 in the two years before filing by anyone in the household
•7. Mortgaging a home to pay medical bills.
In a 2005 article in the Northwestern University Law Review, Prof. Todd J. Zywicki called the $1,000 threshold for contributing medical debt "indefensible." That's an understatement. By H & W criteria, a bankruptcy with $50,000 in student loans and $1,001 in unpaid medical bills would be classified as a "medical bankruptcy." Moreover, the average U.S. household had out-of-pocket expenses of $2,182 in 2001!

In a 2006 review (gated) of the H & W study results in Health Affairs, David Dranove and Michael L. Millenson:

•Recalculate the medical bankruptcy rate using the data given in the H & W paper. They conclude that just 17 percent of the H & W sample "had medical expenditure bankruptcies," although it cannot be stated "with any degree of certainty whether medical spending was the most important cause of bankruptcy."
•Explain that "four decades of studies have addressed the bankruptcy-medical spending connection" and that the results from those studies are much closer to their 17 percent estimate than to the 54.5 percent estimates of H & W.
•Cite a 2002 Fay, Hurst, and White American Economic Review study, which found no statistical link between bankruptcies and health problems.
•Cite a 1999 Domowitz and Sartain Journal of Finance study, which found that high medical debt raised the probability of bankruptcy for the tiny proportion of the population that had high medical debt, but that at the margin, credit cards were the largest single contribution to bankruptcy.

Moreover, Helen Levy in an Economic Research Initiative on the Uninsured working paper estimated the effect of being diagnosed with a serious new health condition, (cancer, diabetes, heart attack, chronic lung disease, or stroke) and found that household consumption "remains smooth" in the face of serious health shocks for both insured and uninsured households.

Should You File for Bankruptcy?

The American Bankruptcy Institute's Consumer Bankruptcy Center has posted this very basic article on how to decide whether you should file for bankruptcy. We will post more detailed articles in the future, but the checklist below is a starting point.

Should I file for bankruptcy?
Whether to file for bankruptcy is a very personal decision. Some people do not have any assets over and above what the law allows them to keep, even if they do not pay their creditors. If this is true of you, then you may not need a bankruptcy in order to protect your assets.

Some people find it helpful to file a bankruptcy case anyway because their financial situation is causing them emotional distress or depression, or because they would like to free themselves of debt now, if legally allowed, and have their income and assets to themselves in the future. Also, some people may find that a bankruptcy is worth filing even if they do lose some of their assets.

Throughout this section of the Consumer Bankruptcy Center, we try to help you decide if bankruptcy is for you.

Considering Bankruptcy Checklist

If several of the following apply in your situation, you might consider bankruptcy:

• Your wages have been garnished or your bank account has been attached
• Most of your debts are unsecured debts like credit card bills, hospital or doctors bills, etc.
• Your total debt, not including your car or house loan, is more than you could pay, even over five or more years
• Collection agencies are calling you at home and/or at work
• Your payments are more than 30 days behind on more than one bill
• There are lawsuits pending against you
• You have high medical bills not covered by insurance
• You owe income taxes that you are currently unable to pay
• You have few assets
• You have little or no savings
• You have had property repossessed (such as a vehicle)

People who have had their wages garnished can especially benefit from a bankruptcy because the bankruptcy will stop the garnishment and could potentially help you get some of the garnished money back.

A law passed in 2005 makes it more complicated to file for bankruptcy and to be freed of past debts.

You should seek advice of competent bankruptcy counsel before deciding whether to file for bankruptcy. You may search for a certified consumer bankruptcy attorney at www.abcworld.org.

American Bankruptcy Institute podcasts interview of consumer debt scholar

American Bankruptcy Institute Executive Director Samuel J. Gerdano interviewed the director of the Center for Consumer Financial Services at Rochester Institute of Technology, Robert Manning, recently about the Credit Card Act signed into law by President Obama in May. Manning, author of Credit Card Nation and founder of the Responsible Debt Relief Institute, is considered one of the leading experts on household debt, spending and the consumer lending industry.

The ABI has posted a podcast of the interview at its http://podcast.abiworld.org/ website.