Summary:
Ashley Deady, "Bankruptcy's Blind Spot: An Examination of How the System Turns its Back on Mentally Ill Debtors," argues that while the Bankruptcy Code promises a fresh start for the "honest but unfortunate debtor," it frequently fails those whose financial distress is intertwined with mental illness. Rather than accommodating the realities of depression, bipolar disorder, anxiety, schizophrenia, PTSD, and other psychiatric conditions, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) often imposes additional barriers through the means test and mandatory credit counseling requirements.
The article begins by exploring the historical parallels between the treatment of debtors and individuals with mental illness. Both groups have long been subjected to stigma, punishment, and institutional discrimination. The author contends that many of those same assumptions remain embedded within the modern bankruptcy system, particularly through BAPCPA's implicit premise that debtors are more likely abusing the system than seeking legitimate relief.
The article then examines the growing body of research showing the close relationship between financial distress and mental illness. Debt can worsen depression and anxiety, while untreated mental illness often contributes to unemployment, interrupted employment, medical debt, and financial instability. Bankruptcy itself may improve a debtor's sense of control, but the filing process also creates additional psychological stress through stigma, public disclosure, and procedural complexity. The author notes studies linking financial crises and bankruptcy with increased rates of depression, anxiety, and even suicidal ideation.
The centerpiece of the article is its critique of the Chapter 7 means test. The author argues that the IRS National Standards incorporated into §707(b) dramatically understate realistic mental health treatment expenses. For example, the IRS allowance for medical expenses is often far below the actual cost of psychotherapy and psychiatric treatment. As a result, debtors whose disposable income is consumed by legitimate behavioral health expenses may nevertheless fail the means test and be forced into Chapter 13 or denied relief altogether. Although courts may recognize "special circumstances," the article notes that many decisions require debtors to prove near-total inability to work before mental illness-related expenses receive meaningful consideration.
The article also criticizes BAPCPA's mandatory pre-petition credit counseling and post-petition debtor education requirements. While intended to encourage financial responsibility, the author argues these requirements often serve only as procedural obstacles for debtors suffering from cognitive impairment, severe depression, anxiety disorders, or other psychiatric conditions. Rather than improving outcomes, these requirements may delay or even prevent access to bankruptcy relief. The article proposes either eliminating these requirements entirely or substantially modifying them to better accommodate individuals with mental illness.
Finally, the author proposes several reforms, including:
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Reclassifying medical debt—including mental health treatment expenses—as non-consumer debt for means test purposes.
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Expanding the interpretation of "special circumstances" under §707(b)(2)(B) to better recognize ongoing mental health treatment costs.
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Eliminating or substantially reforming mandatory credit counseling and debtor education.
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Providing better training for credit counseling agencies regarding mental illness.
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Developing more individualized educational approaches that recognize differing cognitive and psychiatric needs.
Commentary:
This is an ambitious and compassionate article that raises an issue bankruptcy professionals probably encounter far more often than we consciously recognize.
Consumer bankruptcy attorneys routinely represent clients suffering from depression, anxiety, PTSD, bipolar disorder, substance abuse disorders, gambling addiction, traumatic brain injuries, and other mental health conditions. Often those conditions are not the sole cause of the financial collapse—but they are almost always part of the story.
The Bankruptcy Code, however, generally treats debtors as though they all arrive with identical abilities to navigate an extraordinarily complex legal system. BAPCPA added mandatory counseling, education requirements, increasingly complicated forms, the means test, and heightened documentation requirements, all while assuming that every debtor has the organizational skills, executive functioning, and emotional stability necessary to comply.
Many do not.
One particularly persuasive aspect of this article is its criticism of the IRS National Standards used in the means test. Anyone who has represented consumer debtors knows that standardized expense allowances frequently bear little resemblance to actual living expenses. Mental health treatment provides an especially stark example. Weekly therapy, psychiatric care, medications, transportation, and time away from work can impose expenses that are both medically necessary and financially devastating. Yet those costs often fit poorly within the rigid framework of §707(b).
Whether Congress would ever revisit these provisions is, unfortunately, another matter. Two decades after BAPCPA, Congress has shown little appetite for making consumer bankruptcy more accessible, even as medical debt, student loans, housing costs, and behavioral health crises continue to grow. If reform comes, it is more likely to arise incrementally through judicial interpretation and local innovation than through sweeping legislative change.
The article also highlights something bankruptcy practitioners sometimes overlook: the bankruptcy process itself can become another source of emotional trauma. Multiple document requests, creditor communications, hearings, uncertainty, and fear of making mistakes all place additional burdens on individuals already struggling with significant mental health challenges. That reality should encourage all of us—judges, trustees, attorneys, and court staff—to think carefully about how we administer a system intended to provide a fresh start.
Fortunately, North Carolina has long been a national leader in recognizing the connection between bankruptcy and mental health. The Eastern District of North Carolina established the EDNC Bankruptcy Mental Health Project, an innovative collaboration initiated by retired Bankruptcy Judge Thomas Small, legendary Chapter 13 Trustee Trawick "Buzzy" Stubbs, and Jay C. Williams, Ph.D., LCSW, to increase awareness of mental health issues affecting bankruptcy participants. Hopefully that important program remains active and continues serving as a model for other jurisdictions.
As one small step toward continuing that conversation, Karen Walters of Integral Behavioral Health in Cary, North Carolina, and I are planning a presentation on Gambling Addiction and Bankruptcy for the Annual North Carolina Bankruptcy Institute this November in Asheville. We will also be presenting the program remotely for the Dallas Chapter 13 Seminar this September. Mental health issues—including gambling disorder—remain one of bankruptcy's genuine blind spots, and increasing education among bankruptcy professionals is an important place to begin. We hope to see you at either of those.
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