The connection between bankruptcy and health insurance is well documented. For example, research by the Federal Reserve found that health insurance can keep people out of bankruptcy, and the Affordable Care Act reduced medical bankruptcies by half. Naturally debtors may ask what happens to their health-insurance plans in New York bankruptcy. The short answer is that much like a cell phone plan, an insurance policy is an executory contract, but there are other considerations that apply—most of which help debtors.
To explain, the Bankruptcy Code’s definition of property of the estate, found in section 541(a)(1), is broad enough to encompass debtors’ insurance policies. From there the issue is what kind of property they are. Because an insurance policy is an agreement for the insured to pay the insurer for continuously providing coverage, the policy is an executory contract, much like an automobile lease or cell-phone agreement, which can be assumed or rejected by the trustee.
If the debtor chooses to reject the insurance policy, which would probably never be a good idea, then the policy will be considered in breach as of the date of the bankruptcy petition. Any unpaid premiums will be discharged, however. The insurer would have no other recourse to recover from the debtor, but the insurer probably would not agree to cover the debtor again. Debtors who assume their health-insurance policies must do so within sixty days of their bankruptcy filings, and they must cure any unpaid prepetition premiums.
Importantly, an insurance policy is only an executory agreement if it is in force. If the term of the policy expires, then any unpaid premiums are simply unsecured debts. Debtors in this circumstance may want to repay the insurer anyway to obtain a new policy in the future. Regardless, the unpaid amounts will be discharged.
One way health-insurance policies differ from other executory agreements is that they play a positive role for debtors taking the means test. Debtors whose incomes exceed the median for their state must take the means test to keep their bankruptcies in chapter 7. However, they are allowed to deduct their health insurance so long as it is “reasonably necessary.” A trustee may challenge a debtor’s health-insurance policy as unreasonable if the premiums are too high and cheaper plans are available.
Losing health insurance is not something most debtors should fear, but careful planning can prevent any mishaps from derailing a bankruptcy. If you are experiencing financial difficulties and you are worried about your health-care coverage, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.