Consumer Law In the News

New Study Links Credit Card Use With Medical Debt, Not Out-of-Control Consumer Spending

According to a new study (PDF - free Adobe Reader needed), low- and middle-income families are increasingly turning to credit cards to help navigate the growing gap between health care costs and income. The study, titled “Borrowing To Stay Healthy: How Credit Card Debt is Related to Medical Expenses,” was co-authored by Cindy Zeldin, Demos, a public policy research & advocacy group, and Mark Rukavina, the Executive Director of The Access Project (described on its website as a “resource center for local communities working to improve health and healthcare access”). The study was co-sponsored by Devos and The Access Project, both of which contributed additional resource suggestions for the report.

As quoted from the study report’s introduction:

To meet out-of-pocket medical expenses, many patients are turning to credit cards and accruing medical debt. The use of credit cards for medical expenses can be problematic because the resulting debt is lumped in with all other consumer debt, making this debt not only invisible as medical debt, but also subject to a maze of interest rates and penalty fees. To gain a better understanding of this phenomenon, Demos analyzed data from a national household survey of low- and middle-income households with credit card debt. Included in this survey were questions about medical expenses as a component of credit card debt and health insurance status.

The report’s findings demonstrate the enormity of the struggle faced by the poor working class:

• “Over the past six years, health insurance premiums have increased by 73.8 percent, while median income has grown by only 11.6 percent. A family health insurance policy is now equivalent to 18 percent of median family income, up from 8 percent in 1987.”
• “Forty-four percent had credit card debt higher than $10,000 and 57 percent had credit card debt higher than $5,000.”
• “Average credit card debt was higher for low- and middle- income households ($11,623) as compared to households without a major medical expense in the previous three years or medical expenses contributing to their credit card debt ($7,964).
  Average credit card debt was higher for those without health insurance ($14,512) than for those with health insurance ($10,973).
  Average credit card debt was higher for households with children ($12,840) than for those without children ($10,669).”
• “The medically indebted are more likely to be called by bill collectors than those without such medical expenses (62 percent versus 38 percent).”

In the furious lobbying that pushed BAPCPA along, reports of profligate consumer spending were cited as the “cause” of a sharp rise in the number of bankruptcy filings in the US. The reports, however, didn’t match the experience of most consumer bankruptcy attorneys, who saw many (if not most) of their clients being pushed into bankruptcy court not by their inability to control their cravings for high-end designer clothing or the latest and greatest car or technical gadget, but by medical debts - either their own, or a dependent’s. This study now suggests that the problem hasn’t alleviated consumer distress, and may in fact be contributing to it by leading consumers to the utilization of credit cards as a source of payment for those medical debts. What happens when the consumers miss a payment? The interest rate on their card will get jacked up by the card issuer. This often creates a snowball effect with other creditors who will likewise raise the interest rate on their cards - even if the consumer hasn’t been late or missed a payment on that account! Higher rates lead to higher default rates, and those higher default rates lead straight into bankruptcy court.

As I’ve said from the beginning, if the goal of BAPCPA was to reduce the filing rate, it would never succeed in the long term because it did absolutely nothing to address the root causes of bankruptcy, which have precious little to do with consumers’ lack of self-restraint, and everything to do with the continued economic browbeating low- and middle-income families are taking on a daily basis.

© 2007 SC Bankruptcy & Consumer Law Blog.