Should I get health insurance before I file for bankruptcy?

Question

I currently do not have health insurance, but would like to purchase a policy. I am also planning to file for Chapter 7 bankruptcy soon and am worried that my income is too high to pass the means test. Will buying health insurance help me pass the means test? Or is it better to wait until after I file bankruptcy?

Answer

It is best to purchase health insurance prior to filing for bankruptcy. You can use the expense as a deduction on the means test, which may help you qualify for Chapter 7 bankruptcy.

What Is the Means Test?

In order for you to automatically qualify for a Chapter 7 bankruptcy, your gross annual income must be below your state’s median income for a household of the same size. If your income is above your state’s median income, you may still qualify for Chapter 7, but you must pass the “means test.”

The means test takes your monthly income and deducts certain monthly expenses to calculate your disposable monthly income. If your disposable income is low enough, you pass the means test. If it’s too high (so that you can repay your creditors a certain amount) then you fail the means test and cannot file for Chapter 7. (To learn more about how the means test works, see The Chapter 7 Means Test).

You can deduct certain expenses on the means test to lower your disposable monthly income, which in turn helps you to qualify for Chapter 7 bankruptcy. Payments towards purchasing health insurance qualify as one of the means test deductions. (To learn more about allowed expenses and deductions on the means test, see The Bankruptcy Means Test -- Expenses and Deductions.)

Deducting Health Insurance Expenses on the Means Test

When you take the means test, you are allowed to deduct the expenses of three types of medical insurance:

  • health insurance
  • disability insurance, and
  • funds you contribute to a health savings account.

Limits to the Amount You Can Deduct

The only caveat to the health insurance deduction is that the insurance must be “reasonably necessary.” It is unlikely that your trustee would object to your purchase of health insurance as unnecessary. However, the trustee might object to the amount of your premium, arguing that is unreasonable. To combat this, be prepared to provide quotes from other providers to show that the premium you pay for the type of plan you signed up for is not unordinary. Reasonable does not mean you cannot have the higher priced insurance plan, only that the quote is in line with other insurers.

Deductions for Dependents’ Health Insurance

On your Chapter 7 bankruptcy means test, you can also deduct insurance expenses that you pay for any of your dependents, which may include foster children, step-children, or another distant family member who you actually claim as a dependent when you file your annual tax return. Also, you may deduct your spouse’s insurance expenses so long as he or she is not a dependent of someone else.

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