The Bankruptcy Bill: Resources

by hilzoy

For about a week I have been thinking that I should try to write something on the bankruptcy bill that's currently being considered in Congress. I did research, I collected links, but I couldn't figure out how to get around one crucial problem: I don't know anything about bankruptcy law, and I try not to write about things I don't understand. Luckily, however, Josh Marshall has created a new blog devoted to this subject, and turned it over to someone who does understand it: Elizabeth Warren of the Harvard Law School. She's the author of the recent study that showed that over half of bankruptcies are due in part to medical emergencies. (The study was described in this NY Times article.)

Warren's take on the bankruptcy bill:

"The bill is more than 500 pages long, all in highly technical language. But the overall thrust is pretty clear:

• Make debtors pay more to creditors, both in bankruptcy and after bankruptcy, so that a bankruptcy filing will leave a family with more credit card debt, higher car loans, more owed to their banks and to payday lenders.

• Make it more expensive to file for bankruptcy by driving up lawyers’ fees with new paperwork, new affidavits, and new liability for lawyers, so that the people in the most trouble can’t afford to file.

• Make more hurdles and traps, with deadlines that a judge cannot waive even if someone has a heart attack or an ex-husband who won’t give up a copy of the tax returns, so that more people will get pushed out of bankruptcy with no discharge.

• Make it harder to repay debts in Chapter 13 by increasing the payments necessary to confirm in a repayment plan, so that more people will be pushed out of bankruptcy without ever getting a discharge of debt.

There are people who abuse the system, but this bill lets them off. Millionaires will still be welcome to use the unlimited homestead exemption. And if they don’t want to buy a home there, they can just tuck their millions of dollars into a trust, a “millionaire’s loophole” that lets them keep everything—if they can afford a smart, high-priced lawyer.

I don’t get paid by anybody on any side of this fight. I just think it isn’t fair."

More resources and discussion below the fold.

Resources on the bankruptcy bill:

• A post at Angry Bear, in which Kash asks a friend who is "an attorney working for a federal bankruptcy judge" what's wrong with the bill, and posts her response. It's detailed, and quite good.
• A NYTimes story about the 'millionaire's loophole' Warren referred to above. (She cites this article as well, but the link didn't survive my cutting and pasting.) It lets wealthy people shelter their assets from creditors.
• A good post by Kevin Drum, which includes (among other things) a list of some of the proposed amendments to the bill that have been shot down. Do you think that it would be a good idea to allow senior citizens to protect $75,000 of the value of their homes during bankruptcy proceedings, or prevent creditors from recovering on loans made to military personnel who file for bankruptcy if those loans had an APR over 36%? If so, a majority of U.S. Senators do not agree with you. A full list of amendments to the bill is here.
• An analysis of a particularly bad amendment that's supposed to come up for a vote tomorrow. Short version: the amendment raises the minimum wage, but changes the requirements of the minimum wage law in such a way that 6.8 million workers would no longer have to be paid a minimum wage. It also has a host of other bad bits. Read the whole analysis. It's ugly. (Via Atrios.)

*****

In this country, we have chosen to adopt policies that expose people to a large and increasing amount of economic risk. (If you haven't read Peter Gosselin's excellent LA Times series on economic insecurity, you should.) In particular, we have a health insurance system that leaves something like 45 million people without any health insurance at all, and tens of millions more with shaky or inadequate coverage. When they get sick, they have to pay for much of their medical care themselves. As a result, people who file for bankruptcy are not just spendthrifts who rack up credit card debt and then expect to be allowed to walk away from it. Many of them are poor people who just had the bad luck to get sick.

To see what this is like, it's worth checking out this report (pdf) on the budget tradeoffs made by low-income families, from the Kaiser Family Foundation (whose website has all sorts of information on the uninsured.) The report profiles twelve low-income families, and includes detailed information on their budgets, including health care spending and related debts. It's worth reading the report just for the pie charts showing each family's spending during the previous month, and in particular the terrifying proportions that go to housing and food. Here are quotes about the role of health care costs in some of these families' financial lives:

• Josh has worked at a fast-food restaurant for four years, and is looking for a higher-paying job. The hours are uncertain, sometimes dropping to 20 or less a week. His last paycheck for two weeks was just $213. Carol is a stay-at-home mother. The couple is keeping their dial-up internet connection in the hopes that she can find home-based data entry work. Just before their son was born, Josh had a higher-paying job with overtime, but had to quit when Carol got sick. Medicaid covered her two pregnancies but Carol lost coverage after her second baby was born. She is now uninsured. She continues to have serious medical problems, triggered by her pregnancy, and suffers from severe asthma. Josh’s current employer does not offer health coverage. They still owe about $1,000 in medical expenses (not covered by Medicaid) from her two pregnancies and her son’s severe medical and developmental problems. Without coverage, Carol has stopped taking the expensive medicine she needs to prevent a recurrence of blood clots, a condition that almost killed her after giving birth to her first child.
• The family has a heavy load of debt, mostly from unpaid medical expenses. These bills create stresses for the family. “(with Michael working) I hope we get a little peace,” says Patty, “Mostly, all the fighting is financial ... you mad because the light bill people done sent you the disconnect, and you don’t know how you going to pay it, so you take it out on the next one.” Many of their unpaid medical bills date to when they had private health insurance, which did not cover the physical therapy services their daughter needed after she had a serious accident. Because of their poor credit the family pays high interest rates on their mortgage and car loan.
• The family is having a hard time paying off credit card debts. They also have $7,000 of medical debt from treatment Mary got last year when she broke her jaw. Still, they do not want to file for bankruptcy. “We don’t want to get out of our debt,” Mary states, “You know, we made them debts. We needed everything we got from them. So we’re going to pay it.”
• Faith recently had a bout of pneumonia and a slight stroke that landed her in the hospital. Even though Medicare covered 80 percent of the cost, they were still left with a bill of about $3,000, which the hospital is trying to recover through a collection agency. Recently she has been able to get a number of prescription drugs free or at low cost through pharmaceutical company-sponsored programs she found out about through the county hospital. Jack uses the Veterans Administration hospital or the county hospital, where he receives free or subsidized care.

These are the people who would be nailed under the current bill. Contrast this to its treatment of people with enough money to hire good lawyers (from the NYT article cited earlier):

"The loophole involves the use of so-called asset protection trusts. For years, wealthy people looking to keep their money out of the reach of domestic creditors have set up these trusts offshore. But since 1997, lawmakers in five states - Alaska, Delaware, Nevada, Rhode Island and Utah - have passed legislation exempting assets held domestically in such trusts from the federal bankruptcy code. People who want to establish trusts do not have to reside the five states; they need only set their trust up through an institution in one of them. (...)

Current federal bankruptcy law protects assets held in a type of trust, known as a spendthrift trust, traditionally set up by one family member to benefit another. But current law does not protect the assets of people who set up spendthrift trusts to benefit themselves. And the law limits the purposes of the trusts that qualify for exemption. Retirement planning or paying for education are two approved purposes for such trusts.

By contrast, domestic asset protection trusts can be set up by the same people who plan to benefit from them. In addition, there are no caps on the dollar amount of assets they can hold and no restrictions on their purpose, Ms. Marty-Nelson said. "

This is just unconscionable. The Senators and Representatives who vote for this bill should be ashamed.

Comments

[hilzoy]

While I was writing this, Elizabeth Warren was noting that Instapundit agrees with us: "I assume that the Bush Administration is supporting this legislation, but I really don't see it as consistent with "compassionate conservatism." I see it, in fact, as consistent with the worst stereotypes about corporate-friendly Republicanism."

Agreeing with Instapundit. Definitely a new sensation.

[Sebastian Holsclaw]

Credit card companies can take bankruptcy laws into account when they make their rates. They don't need further protection.

[Frank]

Republicans once again demonstrate what personal responsibility means to them, i.e. F**K the poor.

Of course there were some democrats who voted with the Rs.

Good thing McCain/Feingold reduced the influence of money on politics.

[Don Quijote]

Credit card companies can take bankruptcy laws into account when they make their rates.
They already do! why do you think the Interest rates are so high?

I see it, in fact, as consistent with the worst stereotypes about corporate-friendly Republicanism."
Most stereotypes have a solid basis in reality!

compassionate conservatism
an oxymoron on par with military intelligence or business ethics.

Of course there were some democrats who voted with the Rs.
Vichy Democrats are a dime a dozen & then they wonder why they keep losing elections.

[John Thullen]

It's becoming a wonderful life.

"Vichy" Democrats. Who are they? I like the term and I would like to have a Democratic organization called "Club For Justice (or else!)" target these folks in primary elections with some bizarro Larry Kudlow and Stephen Moore left-clones making the case for the removal of Dem traitors from the joke that is now public service.

Domestic policy will create tens of millions of desperate Americans over the coming decades. The leader/demagogue who unites them into a movement will
not be something we want to bargain with. He or she will not be a Republican or a Democrat. He or she will not be a clown like Perot or Buchanan. He or she will be a fearsome thing to behold. He or she won't be a nicey liberal who thinks to use "he or she".

No doubt the private/personal accounts desired by the Social Security phase-out artists will be within the reach of the new bankruptcy laws.

We squeeze the desperate from all sides at our own peril.

[Jay C.]

Interesting post hilzoy, and, of course, quite on the money [/shameless flattery] - but one of the points Josh Marshall (IMO) glossed over is the fact that the Bush Adminsistration, either actively (shilling for itself) or passively (enabling Congressional (i.e., business-lobby) initiatives) has been pushing a number of special-interest legislative programs, such as the bankruptcy bill, while diverting the media/public/opposition's attention with the big Social Security dog-and-pony-show.
To me, the pending bankruptcy "reform" proposals are a perfect example of the dysfunctions showing up in our political system: a major Republican-sponsored bill that will greatly benefit a huge mega-industry, significantly screw larges numbers of middle-class ordinary citizens; sold (where it is even mentioned) with misleading scaremongering about "fraud", and, worst of all, seemingly unopposed by anyone on the other side of the aisle.
Where, even, are consumer-advocacy groups in all this?

[dmbeaster]

This bill is not the exception, but rather the face of the current Republican party. This includes the fraud used to sell the bill -- that it's intended to crack down on so-called abuses of bankruptcy law.

They have been fighting for it for a decade, and were thwarted over the last several years in the Senate by Democrats.

What is the social good in creating a permanent debtor class so that the creditors can squeeze a few more pennies from them? This is a 100+ year throwback -- why not be up front and just reinstitute debtor's prison.

As a lawyer who has done bankruptcy work, a key factor in what is wrong with this bill is that by greatly complicating the law for simple bankrutpcies, you are guaranteeing that people cannot even use the system unless they already have enough money for hefty legal fees. As a practical matter, a law that is too complicated or expensive to implement ends up having a very different impact than its literal provisions. Its like a poll tax -- a law to deny the right to vote although no part of it expressly says so. Its the equivalent of simply telling poor people that they are not entitled to bankruptcy protection -- only wealthy people can use it.

Think about this the next time some Repub hack tells you that Dems are just about class warfare.

[Bernard Yomtov]

Instapundit is correct except I would substitute "accurate stereotype about corporate-friendly Republicanism." for "worst stereotype about corporate-friendly Republicanism."

The bill also confirms that it is the Republicans, with their extreme solicitousness for wealthy bankrupts and harshness towards poor ones, who are the true class warriors in the US today.

Instapundit's comment notwithstanding, I wonder if the right blogosphere will devote 1% as much energy to denouncing this bill as they did to Ward Churchill's stupidity. Which is likely to do more harm?

[John Thullen]

"why not be upfront and just reinstiture debtor's prisons?"

Indeed, the intellectual foundational personalities of today's Republican Party are great admirers of the Victorian Age and Dickensian privation as a means to moral order.

I look forward to the inevitable reaction. The stoicism of Little Dorrit will not be the reaction. We shall live in a Bleak House. We are creating two cities and thus the tale will be told.

And, now, to the circumlocution office.

[Phil]

For as much as people gripe about the marketing activities of pharma companies, if you really want to look at an industry with an outsized marketing budget, it's the credit card industry. I must get 20-30 pieces of mail a week with a Wilmington, DE return address. Straight into the shredder they go. I know I don't have great credit -- they know I don't have great credit . . . so why market to me? Why, so they can extend credit to people who don't rate it, then jack up the terms! Then punish them again with this bill!

[Anarch]

I must get 20-30 pieces of mail a week with a Wilmington, DE return address. Straight into the shredder they go.

Ah, Wilmington, DE. Drove through there once; unfairly, it really did feel like the corporate wasteland its mass-marketing mail suggests.

[My apologies to the good people of Delaware for this drive-by unfairness.]

I know I don't have great credit -- they know I don't have great credit . . . so why market to me?

Many years ago, when I was new to this TA gig, I had two credit cards and was looking to get a third. [I use one for day-to-day purchases, one for online or other special purchases, and I was planning to get a third as a back-up in case it was necessary. Hey, it works for me.] The day I'd made that decision, some telemarketer struck gold: Discover called me and told me I was pre-approved for a really sweet deal on one of their cards. Ten minutes later, I'd given my info to the woman, she had smiled (vocally of course) and I was on my way to having that third credit card.

Until, two weeks later, I got a letter back from Discover saying that my actual approval had been rejected on the grounds that my salary was too low. Something that maybe they should have noticed when I was giving my info in the first place. Yay for being a TA.

That's not what's funny about this story, though. What's funny is that, in the span of ten days, this happened two more times. The third time I basically yelled at the poor unfortunate telemarketer to take my damn name off their list if they weren't planning on actually giving me a credit card in the first place. Haven't heard back from them since, so I guess it worked.

And what's frightening about this story? If that happened today, I'd wager my poverty-stricken salary wouldn't have prevented me from getting that third card; heck, I'd bet it would have been an incentive...

[Brian]

People were wondering why Bush was seemingly obsessed with "reforming" social security. Maybe it was cover for something? A distraction to get this monster in under the cover of darkness?

I like and agree with that quote from Instapundit. And odd feeling, indeed. The only thing is, these guys *always* live down to the worst stereotypes about them.

Always always always.

The only thing missing is Bush in a black top hat, in a black Victorian greatcoat, toying with his villainous black moustache.

[Bernard Yomtov]

Credit card companies can take bankruptcy laws into account when they make their rates. They don't need further protection.

That is correct. And it highlights another aspect of this bill. For all the wonderful talk about accountability, etc., what about imprudent lenders? While the bill's proponents are happy to lecture consumers about the consequences of careless borrowing they seem to feel that lenders should be exempt from the consequences of careless lending.

[Larv]

Anarch,

As a graduate of the U. of Delaware (just down the road form Wilmington in Newark [and that's New-ark, dammit, not New-erk like that shithole in Jersey]), I feel compelled to speak up for the First State. I would suggest that virtually any city looks like a corporate wasteland if you're just driving through on the interstate. Wilmington isn't my favorite city on earth or anything, but it's a nice little city, and you can find decent pizza and cheesesteaks. It's certainly a lot better than Dover, the capital, which is completely devoid of charm or any redeeming characteristics. Horrible, unless you like sprawl, slots, chain restaurants, and traffic. Some might consider NASCAR races a plus, but I'm not one of them.

Anyway, just felt like someone had to stick up for the little states (Or at least the northern parts. Apologies to any BCers). Go Fightin' Blue Hens!

[Gromit]

Brian: People were wondering why Bush was seemingly obsessed with "reforming" social security. Maybe it was cover for something? A distraction to get this monster in under the cover of darkness?

I've still got my eye on "Tax Reform". I think the Democrats need to come up with an alternate proposal that simplifies the code, while maintaining a progressive tax structure (something the current favorite among Republicans does NOT do), and they'd better do it fast.

[bob mcmanus]

I used to believe the counter-revolution would come rapidly, and that the Plutocrats were engaged in self-destructive short-sighted behavior.

Then I realized that a Plutocracy was maintained for at least 40 years(1890-1930), and only dismantled because of a depression, World War, and a couple of union-friendly administrations.

With smarts, brutality, and a little luck, America could be neo-feudalistic Guatemala North for a century or more.

[heet]

I don't think it is wise to believe the SS reform push is cover for anything. Marshall has a good point when he points out the WH is not happy they are having no luck w/ SS. They didn't plan on wasting political capital on purposefully unpopular legislature, believe me.

[heet]

legislation, even

[John Thullen]

I agree with Heet.

Two mistakes: Believing Bush is dumb and believing he is subtle.

It's like 400 bullets. It is what it is.

[John Thullen]

Also, Heet, stick with "purposefully unpopular legislature".

There is a reason for redistricting.

[Nell Lancaster]

Where are people getting this idea that Democrats are just rolling over en masse for this bankruptcy bill? Every one of those amendments to make the bill less unfair to vulnerable people or less of a gift to the rich failed along party lines, with only three (or at most five) Democrats voting the wrong way. All were proposed by Democrats. Two Dems voting wrong, Carper and Biden, are from Delaware; MBNA, headquartered there, is the primary proponent and beneficiary of the bill, as well as being the single largest Republican donor.

Corporate contributions rule both houses of Congress, and Democrats are not perfect, but THIS IS A REPUBLICAN BILL. Yes, I meant to shout.

[Nell Lancaster]

And how weak is Glenn Reynolds' "Who knew?" act. When has the Republican Party opposed any corporate legislative favor? I'd like Republicans here to name one instance of that during the last four years.
I'm glad he's criticizing instead of making excuses, but someone should explain to him the difference between a "stereotype" and a description.

[Slartibartfast]

MBNA, headquartered there, is the primary proponent and beneficiary of the bill, as well as being the single largest Republican donor.

Nonsense. Although it's got to be said that in 2000, that was a true statement. Still, last year they gave only about 3:1 in favor of Republicans, rather than the nearly 6:1 seen in 2000. Dunno what that means, though.

[Anarch]

As a graduate of the U. of Delaware (just down the road form Wilmington in Newark [and that's New-ark, dammit, not New-erk like that shithole in Jersey])...

Yeah, that's where we spent the night; my choir was touring the eastern seaboard and we did a gig at U Delaware at New-ark. Wasn't particularly impressed, but in fairness we weren't seeing the state in the best of lights.

[Larv]

Anarch, how long ago was this? I haven't been up there in a few years, so it's possible that things have gone downhill recently, but when I was there Newark was a fairly typical college town. I wouldn't say it's impressive, really, but pleasant, and not at all a soulless corporate wasteland.

[Anarch]

About four years ago, I think; circa spring 2001, if memory serves. And sorry for the confusion: I meant that Wilmington &c looked like a corporate wasteland and Newark was just kinda boring.

Wow. I sound like I absolutely hated Delaware; I really didn't. Sorry about that, y'all.

[Larv]

Anarch, re: boring; yes, I'll agree with that. Delaware's not the most exciting of states. No big cities, no mountains, not much in the way of beaches, scenic vistas, etc... Just chickens in the south and chemicals in the north. No offense taken, I'm not really a crazy Delaware-o-phile, but my family's from there and I felt the need to mount a pro forma defense of my ancestral state. Let's be serious, who else is going to? Delaware gets no respect, I tell ya. All the bigger states just kick sand in its face. Bullies.

[Sebastian Holsclaw]

A note on 'half the bankruptcies are caused by medical emergencies' statistic. According to Todd Zywicki at The Volokh Conspiracy:

In fact, the "finding" in this article of a massive rise in medical bankruptcies appears to actually be a result in the way in which medical bankruptcies are counted, rather than an actual change in the numbers. They draw their data from two sources. First, self-identified bankruptcy filers who say that some medical event "caused" their bankruptcy. Second, analysis of "objective" facts on filers bankruptcy papers that find either (1) debtor or spouse lost at least 2 weeks of work-related income because of illness or injury or (2) uncovered medical bills exceeding $1,000 in 2 years before bankruptcy, or (3) debtors who say they had to mortgage their home to pay medical bills (which for some reason they list as an "objective" factor rather than a self-identified factor.

Do these findings support the claim that 50% of bankruptcy filings were caused by a "serious medical problem"?

First, consider the self-identified filers. Among the self-identified factors that are listed as "medical" causes of bankruptcy in Exhibit 2 of the article are the following: illness or injury, birth/addition of new family member, death in family, alcohol or drug addiction, uncontrolled gambling. First, it is surely open to question whether uncontrolled gambling or a death in the family really should count as a "medical" problem. More generally, the category "illness or injury" is very broadly defined in the study, and there is no apparent limit on the time frame over which the illness or injury occurred, or the severity. So classifying all of these factors as medical problems that have "caused" bankruptcy certainly seems open to question.

Second, the "objective" measures from the debtors bankruptcy petitions are, if anything, even more questionable. First, the authors count anything above 2 weeks of lost work income as a "serious medical problem." There appears to be no time frame over which this is measured, nor does it apparently even need to be consecutive lost work. So, for instance, if a restaurant waiter called in sick for 2 weeks or more in some indeterminate period of time prior to filing bankruptcy, this would presumably count as a serious medical problem.

Nor does the requirement of $1,000 in unpaid medical bills within 2 years of bankruptcy seem like a very plausible measure of serious financial problems. Again, it is pretty easy to rack up $1,000 in unpaid medical bills over a 2 year period, especially if elective procedures not covered by insurance are added in. Moreover, it is well-understood that debtors who are falling into bankruptcy pick and choose which debts they pay, paying down their mortgage or nondichargeable debts for instance, while not paying their unsecured debts, such as medical and credit card debt. So the fact that the medical debts were unpaid says little, because it may reflect strategic payment of debts prior to bankruptcy.

So the categorization of what counts as a "serious medical problem" is quite questionable in this study. But there is a more fundamental problem that this concern hints at--there is no control group in this study. It is usually Statistics 101 that in order to infer causation from a data observation, it is necessary to have a control group. Absent a control group, it is not clear how the authors can make their claims.

So, for instance, one would want to know how many Americans missed 2 weeks of work or had a $1,000 in medical bills and didn't file bankruptcy. This is precisely why other previous studies have failed to find much of a correlation between health problems and bankruptcy--almost every family in America has a health problem, death in the family, or gives birth every year. Most of them do not file bankruptcy. In short, I suspect a lot of people had medical problems comparable to those who filed bankruptcy, but did not file bankruptcy. Of course, we will never know, because the authors have no control group to determine whether those in bankruptcy were more prone to illness or injury than the population at large.

Moreover, the authors do not compare the amount of medical debt they found to other debt or obligations that bankrupt debtors had. So, for instance, they would count as a medical bankruptcy a debtor who had $1,001 in medical bills, even if that debtor had say $50,000 in student loans, car loans, and other debt. It would be absurd, it seems to me, to say that the $1,001 in medical expenses "caused" that bankruptcy. Nonetheless, it would counted in this study, because the authors do not control for medical debt as a percentage or in relation to the debtors overall debt.

But the problems do not end there. For instance, the authors claim (page W5-71) that from 1981-2001, medical bankruptcies increased 23-fold, citing a study from 1981 published in "As We Forgive Our Debtors." I have read and reread the relevant chapter of that book, and have been unable to determine exactly what criteria were used to classify medical bankruptcies there, and how they compare to here. It appears that the measure used in the earlier work was the pure narrowest form of self-identified filers, those who stated that they filed bankruptcy because of a health problem. In the current study, it appears the authors ask the self-identified filers if health problems were "a reason" for bankruptcy. I can find no evidence that the authors there counted as medical bankruptcies any bankruptcy where the debtor had above a specified amount of medical expenses. Even if it were the case, there is no evidence that the $1,000 figure chosen in the current study was adjusted for inflation over the prior study. Nor is there any indication that the authors attempted to adjust the medical expenses that are found in the current study for increases in debtor's income. So again, it seems like they have just changed their method of counting, not the actual substance.

The authors also do not provide any causal explanation for what could have changed in the medical system to produce a 23-fold increase in health=related bankruptcies in 20 years, and specifically note that the percentage of those in bankruptcy who have health insurance has changed little over that time.

In fact consider the following passage from "As We Forgive Our Debtors":

Our central finding is that crushing medical debt is not the widespread bankruptcy phenomenon that many have supposed. To the extent that the typical debtors in bankrutpcy are painted as sympathetic characters because they are struggling with insurmountable medical debts, these data show that 'typical' is the wrong adjective. Only a few debtors find thmselves in such extreme circumstances.... About half of all debtors carry some medical debt, and many carry substantial medical debt. Althought these medical debts are not the obvious cause of the debtors' bankruptcies they are part of their financial troubles." (p. 173).

Again, what seems to have changed is not the frequency of the underlying problem, but simply the way the data is counted and classified. In the earlier study, the authors noted that half of filers had some amount of medical debt, but recognized that relatively small amounts of unpaid unsecured medical debt or minor injuries were likely not the cause of bankruptcy, because this is a part of the financial life for almost every American family. For the debtors in the earlier study, the medical debt that was found was relatively small in comparison to the bankrupts' other debts. In the more recent study, the authors have simultaneously increased what counts as a "medical problem" and classified even relatively small and trivial medical expenses and problems as bankruptcies "caused" by medical problems. Changing the way you count and classify the same data is not the same thing as finding a 23-fold increase in the underlying problem itself.

I close with an illustration that tries to put the major flaws of this study in perspective and the policy recommendations that have been drawn from it. Suppose that I wanted to find out how many Americans filed bankruptcy because of tax problems. I then interviewed bankruptcy filers and checked their financial records, and counted as a "tax-caused bankruptcy" anyone who either (1) paid $1,000 or more in taxes during the past two years, or (2) anyone who said that if he didn't have to pay taxes he wouldn't have had to file bankruptcy because he would have had more money for his other bills. I suspect that under that criteria I would find a pretty substantial number of "tax-caused bankruptcies." I then conclude that, as a result, we shouldn't make people pay taxes if they believe it might make them file bankruptcy, and that any unpaid tax obligations should get a blanket discharge in bankruptcy (unlike current law, which makes them largely nondischargeable).

Obviously, my hypothetical study of "tax-caused bankruptcies" would be sheer nonsense. I would have no control group (how many other people paid taxes and didn't file bankruptcy), I would have no information about how large my tax payments were relative to other obligations (mortgage, student loans, etc.), and my data would be subject to high rates of self-reporting bias. You would object--"almost everyone pays taxes, what is so unique about this group?" My policy proposal would be ridiculous. In short, my hypothetical study would be properly dismissed as junk science because it fails to use even the most basic statistical controls and techniques.

As I said before, I'm not interested in making it easier for credit card companies to crack down on bankruptcies. But I'm not interested in loosening things up either so I'm a bit skeptical of Elizabeth Warren.

[Bernard Yomtov]

Sebastian,

A few points in response to Zywicki:

1. Even missing two weeks of work due to medical problems may create hardship, and of course it is unreasonable to assume that people who miss at least two weeks' work mostly miss only two weeks.

2. We don't really care, as Zywicki claims, "how many Americans missed 2 weeks of work or had a $1,000 in medical bills and didn't file bankruptcy." What we want to know is how many with the same resources as the filers had these problems and didn't file. If Zywicki wants to lecture about Statistics 101 level blunders he shouldn't be making them himself. He repeats the error in his discussion of "the previous study."

3. Zywicki writes,

the authors do not compare the amount of medical debt they found to other debt or obligations that bankrupt debtors had. So, for instance, they would count as a medical bankruptcy a debtor who had $1,001 in medical bills, even if that debtor had say $50,000 in student loans, car loans, and other debt. It would be absurd, it seems to me, to say that the $1,001 in medical expenses "caused" that bankruptcy. Nonetheless, it would counted in this study, because the authors do not control for medical debt as a percentage or in relation to the debtors overall debt.

His example his OK, I guess, because of the extreme numbers, but the implied principle doesn't really hold. Exceptional medical expenses are unexpected, whereas car payments are not. Suppose someone has a $10,000 car loan, hardly extravagant, and is hit with a $10,000 medical bill, forcing bankruptcy. It seems perfectly reasonable to say that medical expense, rather than the car loan, caused the bankruptcy. Of course these things can often be unclear, but percentages of different kinds of debt don't really get at the issue. The question is whether medical debts over and above normal expectation drove the filer into bankruptcy.

4. All this is not to say that the data are crystal clear and the precise results cannot be disputed. But Zywicki really makes no showing that medical debt is not a serious cause of bankruptcy.

5. In any case, what difference does it make? Why not provide some relief for medical bankrupts, as Democrats propose? If there really aren't that many, all the better.

[Don Quijote]

"Vichy" Democrats. Who are they?

Vichy Democrats are all the people who run as democrats and lack the intestinal fortitude to act like Democrats. the DLC & Joe Lieberman are perfect examples of Vichy Democrats.

The term was coined by Steve Gilliard, it's almost as good as cheap labor conservative.

PS. How many Democrats voted for this fine piece of legislature in the House?

[Sebastian Holsclaw]

"But Zywicki really makes no showing that medical debt is not a serious cause of bankruptcy."

I don't think he is trying to. I think he is suggesting that medical bankruptcies have not particularly increased unless you change how they are recorded.

"In any case, what difference does it make? Why not provide some relief for medical bankrupts, as Democrats propose?"

We already do under the regular bankruptcy laws.

[Mark Shawhan]

You mean the laws that are about to be changed?

[Bernard Yomtov]

We already do [provide some relief for medical bankrupts] under the regular bankruptcy laws.

Not being a lawyer, much less a bankruptcy lawyer, I'm not familiar with any special provisions that might exist to deal with this problem. Perhaps you could explain.

I do know that, per Kevin Drum, Ted Kennedy introduced a couple of amendments to help medical bankrupts that were swiftly rejected. One was to protect $150K of home equity, not an absurd amount, especially given the Texas/Florida exemptions. Drum does not describe Kennedy's other proposal.

The infuriating issues here are:

Senate Republicans seem determined to crack down hard on ordinary people who find themselves in financial difficulties, but are unwilling to do the same to wealthy individuals.

Senate Republicans are unwilling to say that credit card companies have any responsibility whatsoever for their own decisions as to whether or not to extend credit to a particular person.

This is unconscionable.

[hilzoy]

Sebastian: I don't know about the criticisms of claims about an increase in medical bankruptcies -- I don't have the original sources handy, so for all I know it might be a change in counting. However, that doesn't seem to me to be as relevant to the bankruptcy bill as the claims about what percentage of bankruptcies are due to medical problems. And here the original study (linked to in the post) does provide information.

Warren et al break down the various contributing factors into two groups: "Under the rubric “Major Medical Bankruptcy” we included debtors who either (1) cited illness or injury as a specific reason for bankruptcy, or (2) reported uncovered medical bills exceeding $1,000 in the past years, or (3) lost at least two weeks of work-related income because of illness/injury, or (4) mortgaged a home to pay medical bills. Our more inclusive category, “Any Medical Bankruptcy,” included debtors who cited any of the above, or addiction, or uncontrolled gambling, or birth, or the death of a family member."

So by checking the figures for 'Major medical bankruptcy' against 'Any medical bankruptcy', you can tell how much addiction, gambling, and birth or death add to the figures. "Major medical causes" account for 46.2% of bankruptcies; the more inclusive "Any medical cause" accounts for 54.5%. So the bulk of the bankruptcies cited are not caused by e.g. uncontrolled gambling.

As for the question what counts as a serious medical problem, and how much people had to pay for them, that data is included in the study. "Families bankrupted by medical problems cited varied, and sometimes multiple, diagnoses. Cardiovascular disorders were reported by 26.6 percent; trauma/orthopedic/back problems by nearly one-third; and cancer, diabetes, pulmonary, or mental disorders and childbirth-related and congenital disorders by about 10 percent each. Half (51.7 percent) of the medical problems involved ongoing chronic illnesses."

As for how much it cost them: "Debtors’ out-of-pocket medical costs were often below levels that are commonly labeled catastrophic. In the year prior to bankruptcy, out-of-pocket costs (excluding insurance premiums) averaged $3,686 (95 percent CI = $2,693, $4,679) (Exhibit 5). Presumably, such costs were often ruinous because of concomitant income loss or because the need for costly care persisted over several years. Out-of-pocket costs since the onset of illness/injury averaged $11,854 (95 percent CI = $8,532, $15,175). Those with continuous insurance coverage paid $734 annually in premiums on average, over and above the expenditures detailed above. Debtors with private insurance at the onset of their illnesses had even higher out-of-pocket costs than those with no insurance (Exhibit 5). This paradox is explained by the very high costs—$18,005—incurred by patients who initially had private insurance but lost it."

To put the average spending of $3,686 during the past year in perspective, note that the median income of the people surveyed who are classified as 'major medical bankruptcy' was $24,500/year, so we're talking about 15% of an already tiny income.

About causality: the authors say that it's Statistics 101 that to infer causality, you need a control group. Even that's not really true: a randomized trial will have a control group, but a large-scale cohort study (in which you follow a large group of people for years and see who develops what condition) does not have one. But what's more important is this: it would be possible to do a cohort study on bankruptcy, but it would take forever. It would not be possible to do something like a randomized clinical trial, however, since those are used to test some intervention: you randomize subjects into the group you'll do the intervention on and the control group, and see what happens. There is no intervention under consideration here, unless it's the onset of a major medical problem, and it would be obviously wrong (and would never be allowed) for a researcher to randomize subjects into two groups, inflict a medical emergency on one group, and see whether more of them went bankrupt.

There are lots of cases in straight medical research where researchers have to get around similar problems. For instance, how do we know that smoking causes lung cancer? It's not as though anyone has randomized subjects into two groups and asked one to start smoking, and then followed them forever to see who gets cancer. Likewise, we don't randomize people into two groups and instruct one to work with asbestos, or do any other risky thing. Researchers have figured out other ways of getting knowledge in such cases, which don't succeed in eliminating confounding variables as completely as randomization, but do work well enough when (as in this case) a randomized trial is out of the question.

But there's another problem with his causality point. One of the reasons medical researchers have to do all this stuff is because they don't really know the mechanisms that lead a drug to work, or a substance to cause cancer. But in this case, the mechanisms are fairly clear. Bankruptcy is, basically, what happens when you don't have enough money to pay your debts, and can't see that you're going to have enough to pay them in the future. So there are two relevant things: your assets and income on the one hand, and your debts on the other. There's no mystery about how medical bills could cause a person to have debts, and no real possibility of saying, yes, having high medical bills and low income are correlated with going bankrupt, but do they cause bankruptcy? So I think this is a non-issue.

[hilzoy]

From the AP, via Slacktivist:

"The Republican-controlled Senate refused to limit consumer interest rates at 30 percent yesterday as it moved methodically toward passage of legislation making it harder to shed personal debts in bankruptcy."

Priceless.

[Bernard Yomtov]

It looks like the bill is going to pass today, of course without doing anything about the asset protection trust problem.

This is the sort of thing that convinces me that Republican poicies really are intended to create a hereditary aristocracy. No taxes on capital income. No estate taxes. And now no responsibility to pay debts.

These things are simply inexcusable. If people like Snowe and Chafee and so on support this I don't want to hear any more nonsense about how they are really good guy moderates.

[Sebastian Holsclaw]

"Warren et al break down the various contributing factors into two groups: "Under the rubric “Major Medical Bankruptcy” we included debtors who either (1) cited illness or injury as a specific reason for bankruptcy, or (2) reported uncovered medical bills exceeding $1,000 in the past years, or (3) lost at least two weeks of work-related income because of illness/injury, or (4) mortgaged a home to pay medical bills. Our more inclusive category, “Any Medical Bankruptcy,” included debtors who cited any of the above, or addiction, or uncontrolled gambling, or birth, or the death of a family member."

So by checking the figures for 'Major medical bankruptcy' against 'Any medical bankruptcy', you can tell how much addiction, gambling, and birth or death add to the figures. "Major medical causes" account for 46.2% of bankruptcies; the more inclusive "Any medical cause" accounts for 54.5%. So the bulk of the bankruptcies cited are not caused by e.g. uncontrolled gambling."

Right, but the major criticism was that "reported uncovered medical bills exceeding $1,000 in the past [2] years" was a bad standard. I've had more than $1,000 in uninsured medical expenses, but it was my car getting stolen that almost pushed me into bankruptcy.