Illness or Injury: 4 Ways to Avoid Medical Bankruptcy

“If the debtor be insolvent to serve creditors, let his body be cut in pieces on the third market day. It may be cut into more or fewer pieces with impunity. Or, if his creditors consent to it, let him be sold to foreigners beyond the Tiber.” – Twelve Tables, Table III, 6 (ca. 450 B.C.), Ancient Rome

History has rarely been kind to debtors. Personally, I have never felt much sympathy towards the bankrupt: especially those that have Maxed Out their credit cards and lived well beyond their means. But the more I learn about the bankruptcy epidemic (Obama intends to amend the bankruptcy bill signed by Bush in 2005); it’s hard to remain indifferent to the stories.

Until recently, I had always thought that the majority of filers for bankruptcy were deadbeats, but one study noted that more than 25 percent of the respondents cited illness or injury as a specific reason for bankruptcy. Other research has shown the number to be much higher: up to half said that illness or medical bills drove them to bankruptcy.

Let’s take breast cancer as the example. The New York Times found that women lost, on average, more than a quarter of their typical income during the first 12 months after their diagnosis:

Among the many challenges women with breast cancer face, here’s one most people don’t pay attention to: a smaller paycheck… One of the factors affecting lost wages was whether the patient lived close to the treatment center. Women were more likely to suffer large wage losses if they lived farther from the hospital where they underwent treatment. Whether a woman required chemotherapy also affected her income. Women with less education, more serious disease or less social support or those who were self-employed, worked part-time or were recently hired at their current job were the most vulnerable.
Long work absences or ultimately losing one’s job because of an illness is a common theme among those undergoing bankruptcy. According to the Washington Post, the problem is in the health care finance system and in chronic debates about reforming it:
1. Health insurance isn’t an on-off switch, giving full protection to everyone who has it. There is real coverage and there is faux coverage. Policies that can be canceled when you need them most are often useless… We need to talk about quality, durable coverage, not just about how to get more names listed on nearly-useless insurance policies.

2. The link between jobs and health insurance is strained beyond the breaking point. A harsh fact of life in America is that illness leads to job loss, and that can mean a double kick when people lose their insurance. Promising them high-priced coverage through COBRA is meaningless if they can’t afford to pay. Comprehensive health insurance is the only real solution, not just for the poor but for middle-class Americans as well.
But politics aside, there are four ways that people can avoid bankruptcy:
  • Sell everything
  • Work more
  • Reorganize your debt
  • Contact your creditors
Jeez, now those are helpful options when you’re sick. That said, there are four things you can do in a “preventive” way to protect yourself in case of illness:
  • Make sure your health insurance is in order.
  • Create a personal health savings account.
  • Create a backup to your emergency fund. I call this the catastrophic fund: access to cash in the case of long term illness that might result in a job loss. I used to consider my HELOC to be my catastrophic fund… unfortunately, no longer. Now if I depleted all my cash, savings and liquid investments, I’d have to sell off assets or cash out my retirement accounts. The HELOC was intended to buy me time.
  • Live healthy. One of the best ways to avoid the risk of ever facing bankruptcy is to simply be healthy.
Did you find your way here because you’re already in bankruptcy? Here are a few answers to the likely questions. And for those who are healthy, what measures have you put in place to protect against the financial stresses of a long term illness? Please feel free to comment over at Queercents.

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