Health Care Expenses And Bankruptcy

The bankruptcy means test is required from debtors to determine whether they qualify for Chapter 7 bankruptcy. The idea is to examine the debtor’s income, compare it to “average” expenses (provided by the IRS), and identify debtors who can afford to pay unsecured creditors over three to five years.

When Congress debated a major revision to the bankruptcy laws in 2005, the late Senator Ted Kennedy from Massachusetts offered a tweak to the means test. He proposed a change to allow health care expenses even when the debtor does not actually pay for health care. The idea is that a Chapter 7 bankruptcy case is not “abusive” (meaning that the debtor should have filed Chapter 13 instead) unless there is money left after the debtor provides “reasonably necessary” health insurance; disability insurance; and a health savings account. Here is what the committee notes of the form drafters states:

In addition to the expense deductions allowed under the IRS standards, the means test makes provision—in subclauses (I), (II), (IV), and (V) of § 707(b)(2)(A)(ii)—for six special expense deductions. Each of these additional expense items is set out on a separate entry line in Subpart B, introduced by an instruction that tracks the statutory language and provides that there should not be double counting of any expense already included in the IRS deductions.

One of these special expense deductions presents a problem of statutory construction. Section 707(b)(2)A)(ii)(I), after directing the calculation of the debtor’s monthly expenses under the IRS standards, states, “Such expenses shall include reasonably necessary health insurance, disability insurance, and health saving account expenses . . . .” There is no express statutory limitation to expenses actually incurred by the debtor, and so the provision appears to allow a reasonable “monthly expense” deduction for health and disability insurance or a health savings account even if the debtor does not make such payments, similar to the way in which the National Standards give an allowance for food, clothing and personal care expenses without regard to the debtor’s actual expenditures. However, the statutory language might also be read as providing that the debtor’s “Other Necessary Expenses” should include reasonable insurance and health savings account payments. Since “Other Necessary Expenses” are limited to actual expenditures, such a limitation could be implied here. The forms deal with this ambiguity by allowing the debtor to claim a deduction for reasonable insurance and health savings account expenses even if not made, but also require a statement of the amount actually expended in these categories, thus allowing a challenge by any party who believes that only actual expenditures are properly deductible.

In other words, the debtor is not required to pay unsecured creditors through a Chapter 13 plan while the debtor is uninsured. The debtor is able to pay the costs for “reasonably necessary” health insurance; disability insurance; and a health savings before paying unsecured creditors during bankruptcy. Including medical insurance for debtors with no medical insurance could mean the difference between passing or failing the means test for above median income debtors. The same may be true for under-insured debtors.