• Medical Debt For Rural Americans

    Posted by

    Katie Porter

    A recent study conducted by the Access Project reports on the sizeable medical debts facing rural Americans. A survey asked Kansas farmers to report on their medical bills to doctors, hopsitals, dentists, and pharmacies. Although 95% of the farmers and their families had some form of health insurance, approximately 1 in 6 families had outstanding medical debts. The median amount of medical debt among those who had overdue bills was $2,500.

    These data align with my empirical research about rural Americans who file bankruptcy. My principal finding was that rural debtors are in terrible shape, with very high debts and very low incomes when they file bankruptcy. Their situations are worse even those of debtors living in urban areas, the demographic studied in most empirical work.  As I wrote in Going Broke the Hard Way: The Economics of Rural Failure, 2005 Wisc. L. Rev. 969, 1015-1018, rural families were significantly more likely than urban families to have faced large out-of-pocket medical bills before bankruptcy. This was true despite identical rates of insurance among the two samples of debtors. I hypothesized that this disparity resulted from differences in the quality and scope of the health insurance, and noted that at least one author had concluded that rural people were less likely to have employer-provided insurance, which is often more protective than the high-deductible or catastrophic policies that are affordable to those who cannot purchase group coverage. The Kansas farmers fit this model, although note that my sample contained almost exclusively non-farming rural citizens.

    To the extent rural America is home to more self-employed people, more low-wage workers, and more people working for small companies, the percentage of those having to settle for high-deductible, limited-coverage health policies for cost reasons is likely to be higher. And as co-bloggers Melissa Jacoby, Elizabeth Warren, and Debb Thorne have observed, the quality of health insurance can be as important as the presence of insurance in preventing overwhelming medical bills. Medical debt is just one more way that rural Americans are particularly vulnerable to financial collapse.

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  • Bad News and Bankruptcy

    Posted by

    Elizabeth Warren

    One of the most contentious debates of the past two decades has been the argument over whether  consumer debtors file for bankrutpcy largely because they have run out of other options following significant financial disruptions, such as job loss, medical problems and family break up.  Teresa Sullivan, Jay Westbrook argued this position in Fragile Middle Class based on 1991 studies of the families that filed, and Tyagi and I add more data on the the point using 2001 data in Two-Income Trap.  Fay, Hurst & White analyzed PSID data and concluded that debtors were more strategic, filing when it was economically rational to do so and not when triggered by other events.  (Fay, Hurst, White, The Household Bankruptcy Decision, 92 American Economic Review 706 (2002))

    Now comes Jonathan Fisher at the Bureau of Labor Statistics with a new paper that analyzes the same PSID data the earlier economist team used.  Fisher has several interesting findings, but two are highly relevant to the negative-event/strategic debates.  The first is that people do not file when they could best maximize their benefits.  If debtors behaved like the rational maximizers beloved by all economists, then they would have filed for bankruptcy at least a year earlier.  Instead, they held off, kept paying and filed only later.   Fisher concludes that something else held these people back (could it be stigma?).  He suggests that they filed only when it was clear that they were in a deep enough hole that things were never going to get better. 

    Fisher also noted that White has a problem with the fact that about 17% of the population would benefit from bankruptcy, but only about 1.5% actually file.  But Fisher made an interesting observation about the benefit-but-not-file group:  they were in a lot better financial shape than the benefit-and-file group.  While Fisher doesn’t push any conclusions about this, the finding is consistent with a picture of debtors who do not want to file for bankruptcy, no matter how attractive bankruptcy might seem to an economist.  Instead, these people file only when the pressure from their creditors are greater and the likelihood they can ever pay these debts off is smaller.

    The PSID data pose substantial challenges.  For example, there is gross under-reporting of bankruptcy filings (.42% in PSID when national rate was .89%). This means either the sample isn’t representative of Americans generally or people are concealing their bankruptcy filings even as they fill out PSID questionnaires.  ("Bankruptcy?  Me?  No way!") 

    The paper has many nuggests, but the headline finding goes right to the question about who uses the bankruptcy system.   

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  • Dana Redux: Bank Power!

    Posted by

    John Pottow

    When Sen. Edward Kennedy (D-MA) got 503(c) into the new bankruptcy bill, I am sure he thought he was protecting rank-and-file employees from the perceived ravages of excessive corporate executive compensation.  And maybe he was.  But as someone who doesn’t think KERPs are inherently evil, I was struck by Floyd Norris’ insightful reporting in today’s New York Times — which I just saw Co-Blogger Lawless has posted a link to — regarding the denial of the Dana executive compensation package under 503(c).  I will not repeat Professor Lawless’s thoughtful comments, but I will add another, which may buttress his, that troubled me with the ruling.  I don’t mind purposive statutory interpretation, but one must acknowledge that it can sometimes open a can of worms.  And one of the worms that has crawled out in this case is the well placed criticism that Dana’s exec comp package doesn’t look all that different from Calpine’s, which recently got the judicial OK.  At pains to distinguish Calpine, Judge Lifland noted that the creditors there logrolled with the plan, whereas with Dana, they did not.  (For that matter, neither did Dana’s shareholders, employees, nor even the US Trustee.)  But was that the basis of distinction that Congress truly wanted, if we are searching for legislative purpose — whether the creditors said it quacked too much like a KERP?  Was according creditors another veto right in the debtor’s magement affairs what Sen. Kennedy had in mind when pushing 503(c)?  I am doubtful.

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  • Lifland Rules

    Posted by

    Bob Lawless

    Judge Lifland ruled against Dana Corporation yesterday. Floyd Norris continues his good reporting on this story in today’s N.Y. Times. According to Mr. Norris, Judge Lifland said, "This compensation scheme walks like, talks like, and is a KERP." A "KERP" is a key employee retention plan, and if you are unfamiliar with this case, see my previous postings here and here.

    If I ran the world, Judge Lifland would be right, but I am not sure the statute Congress passed supports his reasoning. The statute does not reach things that walk like, talk like, and look like KERPs. Rather, it reaches payments "for the purpose of inducing [a corporate insider] to remain with the debtor’s business." Here, the payments were made for the purpose of inducing the corporate insider to reach certain performance benchmarks. They may have been easily met benchmarks, but they were still performance benchmarks. Yeah, one might say the benchmarks were so low that they were essentially done for the purpose of inducing the insider to remain with the company. That argument proves too much, however, as every bit of salary and benefit paid to an employee is done to induce the person to remain with the company. There is no indication that Congress intended courts to apply the new rules to all forms of compensation to corporate insiders.

    In the end, this case comes down to the question of whether we apply the statute the way it was written or the way we think Congress wanted to write. (This is a pervasive question in statutory interpretation as I previously discussed.) I wish Congress had written the statute the way Judge Lifland interprets it, but I am not sure it did.

    All of my comments on this case are based on Mr. Norris’s reporting in the N.Y. Times. It will be interesting to see if a written opinion emerges to explain Judge Lifland’s reasoning more fully. Until we can assess how broad this ruling might be, I wonder what it will mean for Manhattan as a venue choice for publicly traded companies filing bankruptcy.

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  • OJ, Rights of Publicity, and Debtor-Creditor Relationships

    Posted by

    Melissa Jacoby

    According to an Associated Press report (yes, as published on ESPN.com), Ron Goldman’s father has asked to receive OJ’ Simpson’s rights of publicity because Simpson has never paid out on the multi-million dollar wrongful death claim.  Seems to me that if the right of publicity is considered a property right under the relevant state laws that a judgment creditor should be able to reach it.  After all, some sports figures create separate corporate entities that manage and own their rights of publicity.  Of course, as Diane Zimmerman and I wrote here a few years ago, the issues may be just a bit more complicated than I’m now suggesting  . . . 

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  • Will Dana Be the New K-Mart?

    Posted by

    Bob Lawless

    Floyd Norris continues his reporting (N.Y. Times) on the battle over executive pay for bankrupt Dana Corporation, an auto parts maker. Restrictions passed in 2005 limit the ability to pay executives of bankrupt companies a bonus merely to stay with the company. I previously posted on another of Mr. Norris’s columns noting that corporate bankruptcy attorneys expected this provision to have little substantive effect. It is easy to structure a bonus plan so the payment is for some easily attainable goal, such as having the company emerge from bankruptcy, rather for staying with the company.

    Today, however, Mr. Norris notes that the U.S. Trustee has filed a brief opposing Dana’s bonus plan. That ups the ante. The U.S. Trustee has joined Dana’s creditors in arguing that the company’s compensation plan should be recharacterized as a retention plan. Dana would pay its executives a  large bonus if the company emerges from bankruptcy and another large bonus if the company’s securities hit certain targets six months after bankruptcy. The U.S. Trustee and the creditors argue that the targets are so low and likely to be met that the bonuses are not true incentives and thus are better characterized as retention bonuses.

    What will happen if the bankruptcy court rules against Dana? Will such a ruling cause bankrupt companies to avoid filing in Manhattan, much as a ruling in the K-Mart case caused bankrupt companies to avoid filing in Chicago? Is Dana’s compensation plan out of line with what other companies in chapter 11 are doing?

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  • Students and Credit Cards

    Posted by

    Debb Thorne

    Classes begin here at Ohio University tomorrow. A new group of first year students are headed our way. Most, for the very first time, are out from under their parents’ roof, and, as a result, will experience many new freedoms: the freedom to eat what they want, date whom they want, attend class if they want, sleep as late as they want, do drugs if they want, and…..get credit cards if they want. Here at OU, as predictably as the beautiful foliage in the autumn, the credit card companies set up tables to solicit new (and quite unsuspecting) students. In exchange for some silly thing, such as a tee-shirt, a towel, or a sandwich, students are asked to fill out a credit card application.

    The students are completely ignorant of the "terms of the contract" that they sign. Almost without exception, they have no idea what the APR is. They have never heard of "universal default." And they are shocked when they learn that a cash advance costs them more in interest than a card purchase. I know this because every quarter at least one week in each of my classes is devoted to the potential evils of credit cards. When students learn the truth about the "fine print," they are angry to say the least. They feel set up and exploited. "Why," they ask, "doesn’t someone tell us about this BEFORE we get the credit cards?"

    And I guess that’s the point of this blog. If you know of a young person who is headed off to college, please talk with her or him about the fine print on credit card contracts. And if you don’t understand the fine print yourself, learn it. And then pass that knowledge on to the younger folks. On campuses everywhere, we stress to our students the importance of eating healthy so that they avoid the Freshman Fifteen; we tell them to drink responsibly and in moderation; we stress the importance of safe sex; we discourage them from skipping classes. But seldom do we stress to them how critical it is to keep their credit good and their credit report clean.

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  • Filing Fee Fiasco

    Posted by

    Katie Porter

    There is no rest for those weary of heated and divisive debate about changing the bankruptcy laws. Congress is currently considering legislation to fund a hike in the no-asset fee for Chapter 7 panel trustees. There seems to be general support that the current no asset fee of $60  is too low. Since 95 percent or more of Chapter 7 cases result in no distributions to generate additional revenue for trustees, most trustees receive only the $60 per case. The problem is how Congress is proposing to generate the extra $40 per case–by raising the Chapter 7 filing fee. Groups like the National Associaton of Consumer Bankruptcy Attorneys are concerned about the affordability of bankruptcy relief. Since October 2005, the filing fee has already increased to $299 through a series of rate hikes in BAPCPA and in legislation that followed. Combined with the costs of credit counseling and financial education, the total costs of a Chapter 7 consumer bankruptcy filing now are $399. The National Association of Bankruptcy Trustees is pushing the fee hike on the basis that additional work is required of trustees under BAPCPA and a raise in fees is needed to ensure the recruitment and retention of quality trustees.

    The tension over the fee hike illustrates the "law is not free" adage. Somebody has to pay for the law’s new requirements. Should it be consumers who are the "users" of the bankruptcy system? Don’t creditors (or at least certain types of creditors) benefit from bankruptcy as well? After all, isn’t that purpose of the meeting of creditors and the trustee’s work–to ensure that all available assets are identified and distributed to creditors.

    This problem gets tougher to resolve when the fee increase issue is combined with BAPCPA’s addition of an in forma pauperis filing option for debtors. When a court waives the filing fee for a debtor, the Adminstrative Office of the U.S. Courts doesn’t collect any money. And it is this money that is supposed to fund the trustee’s fee. Who takes it on the chin in these situations? Why should the trustee work for free? Should taxpayers collectively have to bear the cost of a new bankruptcy system? If creditors wanted the means test and more trustee scrutiny, should they have to pay for it–for example, by making the distribution of assets to a trustee larger in asset cases to compensate for the work in all the no-asset cases?  What should a court do that is concerned about ensuring that trustees do quality work but that also wants to ensure access to the bankruptcy system for the most needy debtors when evaluating whether to let a debtor proceed without paying the filing fee?

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  • The Next Medical Bankruptcy Candidate

    Posted by

    Elizabeth Warren

    I noted a small blip in a story by Rick Lyman at the New York Times about the newly released census data.  It seems that another 1.3 million people lost health insurance between 2004 and 2005.  That brings the 2005 total to 46.6 million Americans without health insurance.

    I figure that pretty much all the poorest Americans already had no health insurance.  The latest 1.6 million most likely represent a continuing expansion of the uninsured middle class.

    With "medical bankruptcy" having entered the lexicon in the past year, this new stat makes me pause to think about risk.  I just did an interview about this with Karen Springen at Newsweek.  On the research side, papers with Melissa Jacoby and Debb Thorne (both on this blog) and David Himmelstein and Steffie Woolhandler (both Harvard Medical School) show that health insurance is no guarantee that someone won’t end up in financial collapse following a serious medical problem.  But insurance makes a difference on where the tipping point occurs.  For the uninsured, the $11,000 hospital bill following a slightly dodgy appendectomy spells financial doom.  For the insured, it may take a more serious round of surgery and rehab after a bad fall to hit that same $11,000 in uninured costs out of a total bill of $50,000.  Of course, either group can be beaten up financially by time lost from work.  This is all just a question of vulnerability by degrees.

    With the changes in the bankruptcy law making many people feel that the option has become too expensive or too difficult to accomplish, what will happen to the 1.6 million newly uninsured?   Many won’t get sick, and others who get sick won’t seek medical care.  But for some, modest medical problem will put them in a financial hole from which they can never recover.  If they don’t go to the bankruptcy courts, what will happen to them? 

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  • Job Security Polling Data

    Posted by

    Melissa Jacoby

    Employment problems figure prominently in discussions about personal bankruptcy filings, so both the perception and reality of job security are relevant to those of us who study or work in the debtor-creditor system or who are trying to figure out whether people adequately recognize and prepare for adverse events.  Karlyn Bowman, a resident fellow of the American Enterprise Institute, has just posted a very useful updated set of major polling data on work and workers’ perceptions — see here for the press release and here for the report containing the polling data. 

    It is particularly interesting to compare responses to questions about events that actually have happened (in the past to themselves or to other people) with questions about perceptions of their own job security risk.  For example, in a 2005 poll that asked whether their employer had laid off any employees in the past six months, 27% reported that there had been layoffs.  And 22% in a 2005 poll reported having been personally laid off or fired in the past five years (I can’t tell from the report whether these 2005 results are from the same or different polls – check out pages 10-12 of the report).  But in April 2006, only 10% said it was very likely or fairly likely that they would lose their jobs (15% said they were worried about being laid off in a 2005 poll, in response to a differently worded question).  Readers also may want to check out the results of the questions about wage and benefit reductions.  Although interpreting the job loss findings together should be undertaken with care, they appear to present an interesting contrast to polling respondents’ worries about falling deeply into medical debt that I wrote about when Credit Slips first began. 

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