New data from a Consumer Bankruptcy Project (CBP) study published in the American Journal of Public Health shows that about two of every three bankruptcies in the U.S. are directly related to medical issues.
This is nothing new, as medical bills resulting from an illness or injury led to about two-thirds (65.5%) of all personal bankruptcies between 2001 and 2007, before the Affordable Care Act was passed in 2010.
But it should be of concern to 401k advisors as well as plan participants, because middle-class workers making up a majority of 401k plan enrollees are most likely to file for personal bankruptcy due to medical bills resulting from an illness or injury.
Many might raid their 401k in an attempt to stave off filing for bankruptcy, which can lead to dire consequences down the road.
In this latest study, CPB examined 910 bankruptcies filed between 2013 and 2016 and found 67.5% were brought about by medical issues, as families were unable to pay high medical bills, often exasperated further by a loss of income because they cannot work due to the illness or injury.
The report found about 530,000 American households see their finances wiped out each year due to medical costs.
“Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy,” said lead study author Dr. David Himmelstein. “For middle-class Americans, health insurance offers little protection. Most of us have policies with so many loopholes, copayments, and deductibles that illness can put you in the poorhouse. And even the best job-based health insurance often vanishes when prolonged illness causes job loss—just when families need it most. Private health insurance is a defective product, akin to an umbrella that melts in the rain.”
The report found no evidence that the ACA reduced the proportion of personal bankruptcies caused by medical problems, even though that problem was often cited in congressional debates as a reason to urgently pass the ACA in 2010. Medicaid expansion under the ACA also did not improve the number of medical-related bankruptcies.
Middle-class households made up most of the filers, as lower-income families most helped by the ACA tend to seek formal bankruptcy relief less frequently because they have fewer assets to protect and less access to legal help needed to navigate formal bankruptcy proceedings.
“In the Supreme Court’s words, bankruptcy is a fresh start for the ‘honest but unfortunate debtor.’ Our study shows that for many bankruptcy debtors, the misfortune continues to come from the way we pay for health care,” said study co-author Robert M. Lawless. “Bankruptcy may provide a fresh start, but it comes at a high financial and emotional cost for those who file. Filing for bankruptcy can stop the financial bleeding that the health care system imposes, but curing that system’s ills is the only lasting solution.”
Senior bankruptcy rate triples since 1991
Seniors, in particular, have seen the risk for bankruptcy increase significantly over the years. Since 1991, the rate of seniors age 65 and older who have filed for bankruptcy has tripled according to prior research from the CBP.
Deborah Thorne, one of the authors of both referenced CBP studies, says the financial squeeze on older Americans has gotten tighter and tighter as the social safety net that they can depend on has weakened. They may have had their retirement savings decimated by the 2008 recession, they may not have a pension, and medical expenses may be racking up.
In a 2018 interview with NPR, Thorne noted how things have changed over the years for seniors.
“If we look at this historically, we had Social Security in place that was adequate, right? You could start full benefits, full replacement benefits at earlier ages. And we had defined benefits rather than defined contributions where we weren’t taking the risk ourselves. So what we’ve seen is these risks that are just in life have been shifted off onto individuals. And that has been exacerbated by policy decisions over about the last 20 years.”
The vulnerable seniors, she says, are drowning in debt. “Here’s something that’s really tragic, is when they strip their 401ks and their retirements to try to pay their bills. And they have nothing left to draw on. And they cannot stave off the debt collectors any longer. And that’s finally what pushes them over the edge.”
The report also found 44% of American families faced an unexpected medical expense within the past year and that 40% of those surveyed don’t have the money on hand to manage a $400 emergency.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
