Five long years ago, Rose Shaffer’s life seemed sweet. A nurse since the early 1970s, Shaffer had spent most of her sixty years working at various Chicago hospitals, rising through the caregiver ranks and raising three kids. Now in the twilight of her career, she’d been hired as director of nursing at a home health agency in the suburb of Lombard. The position made Shaffer proud–she knew her salary could pay off the mortgage on her house a little sooner. At the time, her cousin Barack Obama was fast becoming a rising star in the Illinois State Senate.

Seven months into her new job, Shaffer suffered a heart attack, and an ambulance rushed her to Advocate South Suburban Hospital. Shaffer assumed she was automatically covered–health insurance was a given at her previous nursing jobs. She thought she’d filled out the proper forms. But she hadn’t.

A week later, Shaffer received a bill from Advocate for the three days she’d been hospitalized. It was for $18,000. Shortly thereafter, Advocate began sending letters to Shaffer demanding payment. Then, a summons to appear in court was tossed on her porch. Advocate was suing her.

Shaffer was terrified and didn’t show at her court date. She says she even received a letter from the Cook County Sheriff’s Department, threatening arrest unless she appeared. Under pressure from Advocate and now behind on her mortgage payments, Shaffer filed for Chapter 13 bankruptcy in December 2002, which meant her debtors would garner a reduced portion of the money she owed.

“The hospital saved my life, but now they were trying to kill me,” Shaffer says.

Rose Shaffer’s experience has become disquietingly common. Since 2000, Harvard associate medical professors Steffie Woolhandler and David Himmelstein, along with Harvard law professor Elizabeth Warren and Ohio University sociology and anthropology professor Deborah Thorne, have been compiling data on bankruptcies in the United States. Their study, published on February 2 by the medical policy journal Health Affairs, found that between 1981 and 2001, medical-related bankruptcies increased by 2,200 percent, an astonishing explosion in a relatively short period of time. This spike far outpaced the 360 percent growth in all personal bankruptcies during roughly the same period.

In addition, the study uncovered surprising information about the affected population. While poor, uninsured Americans have long been the most obvious victims of a defective healthcare system, it’s the middle class that suffers most in this case, accounting for about 90 percent of all medical bankruptcies, says Warren.

“The people we found to be profoundly affected are not some distant underclass. They’re the very heart of the middle class,” Warren says. “These are educated Americans with decent jobs, homes and families. But one stumble, and they end up in complete financial collapse, wiped out by medical bills.”

With so many middle-class American households potentially vulnerable, you might think politicians would seek a solution sensitive to their interests. Yet the momentum in Washington is in the opposite direction–toward bankruptcy “reform” that would make things worse for people who have been financially ruined by illness.

Until twenty-five years ago, filing for bankruptcy because of debts from a medical problem was virtually unheard of. In 1981, University of Texas law professors conducting bankruptcy research noticed that a handful of the debtors they were studying could never quite pay off their medical bills, but while these bills certainly didn’t help, they weren’t forcing people into bankruptcy.

Today, by contrast, medical-related debt is the second leading cause of personal bankruptcies, topped only by job loss. Edward Janger, a professor at Brooklyn Law School, gives two reasons for the change: First, there’s been a dramatic rise in healthcare costs. In 2002 Americans paid an average of $5,440 in medical expenditures, up $419 from the previous year. A September 2004 study by Families USA found that 14.3 million Americans now hemorrhage more than a quarter of their earnings into healthcare costs.

Second, the past fifteen years have seen a tremendous spike in the number of Americans who either don’t have health insurance or have such skeletal coverage they might as well have none–there are currently some 45 million uninsured Americans, a jump of 10 million since 1990.

“What you’re seeing in the bankruptcy numbers is a function of the fact that we have a very thin social safety net in this country in terms of health care,” Janger says.

The Health Affairs study, which looked specifically at a cross section of 1,771 bankruptcies filed in 2001, concluded that the average medical debtor was a 41-year-old homeowning woman, with children and at least some education. The study also found that a majority of middle-class debtors had health insurance both when they first grew sick and at the actual time they filed, another surprise. Insurance alone, it turns out, doesn’t prevent medical bankruptcy, because it is often too porous to provide a real buffer against the financial burden of a serious illness.

“A lot of people were bankrupted because of co-payments, deductibles or uncovered services, which added up to thousands of dollars in bills,” says Steffie Woolhandler.

The story of Judy and Phil Specht shows how quickly livelihoods and bank accounts can collapse in the shadow of an illness, even when people initially have health insurance. It also demonstrates how medical problems, when coupled with job loss, can be particularly devastating–many debtors grappled with medical debt and income loss simultaneously, according to the Health Affairs study.

In 2001 the Spechts were living comfortably in Albuquerque, New Mexico, having worked at solid jobs there for years–Judy at a Philips semiconductor factory and Phil as a maintenance man at a retirement community. Together, the Spechts were bringing in around $40,000, which in New Mexico was enough to make the $787 monthly mortgage payment on their new home and still have a little left. Lately, Phil hadn’t been feeling great–his body ached more than usual–but the Spechts both had health coverage through their jobs. In their late 50s, they were near enough retirement to taste it.

By 2002, though, Phil had grown worse, and after a series of tests, doctors diagnosed myelodysplastic syndrome, a bone-marrow disease that can cause leukemia. Phil retired and began collecting $1,080 a month in Social Security disability payments.

“I still had a good paying job with insurance that could cover us both, so I thought we’d be OK,” Judy says.

But when Philips started shuttering some of its New Mexico factories three months later, Judy was laid off. She quickly found a job working at another semiconductor company, but after five months she was axed again. Now desperate, Judy took a housecleaning job at near-minimum wage. It was all she could find.

Fortunately, the Spechts only paid $50 a month for Phil’s visits to University of New Mexico Hospital oncologists, thanks to UNM’s charity care. But they had trouble affording the regular blood work Phil needed and the monthly $507 in prescription drug payments for both of them, climbing quickly because Judy developed high blood pressure, high cholesterol, acid reflux and an underactive thyroid–“stuff I hadn’t experienced before this.”

To save money, Judy chopped her blood pressure and thyroid tablets in half, took the acid-reflux medication less often than prescribed and quit her cholesterol pills altogether. “I was left with a choice of my medication or a roof over our heads.”

To afford Phil’s medicine, the Spechts sold their furniture, some jewelry and a camera. But by the end of 2003, $4,000 deep in medical debt and with $90,000 still left on their mortgage, the Spechts knew they couldn’t hold on to their house any longer.

They hired a bankruptcy lawyer and filed for Chapter 7, freeing them from debt but eviscerating their credit for seven to ten years. The bank foreclosed on their mortgage, and the Spechts moved twice before settling in a cheap apartment for people over 55. Although they now participate in a new state program that offers drug discounts to elderly New Mexicans, the Spechts still owe $1,000 in medical bills; even after filing for bankruptcy, the couple continued to rack up bills until Judy finally landed a state job that gave her health coverage. The stress of the past three years has changed the Spechts forever. Judy describes the whole process as “frightening and humiliating.”

“We’d wanted to retire in that house. We were heartbroken,” she says.

The nightmare lived by the Spechts and other Americans could become even more harrowing if some members of Congress have their way. For years now, a powerful coalition of banks and credit-card companies has been lobbying Congress to make it harder to file for Chapter 7 bankruptcy, which cancels personal debt, in favor of Chapter 13, which involves paying back a portion over a period of time. As the number of personal bankruptcies has surged–from approximately 718,000 in 1990 to 1.54 million in 2004–banks and credit-card companies say, they’ve lost billions of dollars in canceled payments.

Republicans, and some Democrats, have long been pushing a bill that would create a means test for debtors who want to file for bankruptcy, preventing anyone who makes over the median income in their home state from filing for Chapter 7, but allowing them to file for Chapter 13. The idea, proponents say, is to make debtors take better care of their money.

Although the bill has failed in years past, Iowa’s GOP Senator Chuck Grassley, buoyed by Republican Congressional gains and past support from moderate Democrats like minority leader Harry Reid, recently reintroduced the legislation. “People who have the ability to repay some or all of their debt should not be able to use bankruptcy as a financial planning tool so they get out of paying their debt scot-free while honest Americans who play by the rules have to foot the bill,” says Grassley’s spokesperson Jill Kozeny. Kozeny also notes that medical expenses would be deductible under the means test, and that adjustments to the test would be allowed if debtors show “special circumstances.”

Jim Manley, Reid’s communications director, says Reid will support the legislation, which he believes will force people to “take a measure of personal responsibility” for their financial affairs. Reid and some other Democrats will insist that it contain a provision preventing abortion clinic protesters from filing for bankruptcy to avoid paying legal fines (a practice that Reid, who is antichoice, nonetheless opposes). Such a provision was added to the 2002 version of the bill in an attempt to give political cover to Democrats (including Senators Chuck Schumer and Hillary Clinton) who voted for it.

The legislation has nonetheless elicited some principled and vigorous Democratic opposition, from John Kerry, Jon Corzine, Dick Durbin and Ted Kennedy, among others. The bill’s critics argue that it will squeeze the lower middle class right out of the system. This demographic, they say, might still earn above their state’s median income, deductions notwithstanding, yet may not be able to afford to hire an attorney to prove through litigation that their story is exceptional.

Moreover, says Elizabeth Warren, there’s a good chance many middle-class debtors wouldn’t even be able to make Chapter 13 repayments. Nearly two-thirds of those who file for Chapter 13 aren’t able to pay up, leaving them vulnerable to creditors for years, she notes.

“The catastrophic problems which cause families to file for bankruptcy are not properly addressed by imposing greater requirements on people trying to get a fresh start,” adds Ralph Mabey, co-chair of the legislation committee for the National Bankruptcy Conference, a national collective of bankruptcy experts that opposes the legislation.

Medical debtors, as the Health Affairs study shows, are suffering real hardship, which makes it hard to believe they are simply shirking their obligations and freeloading off the system, as Republican rhetoric suggests. In the two years before filing, 22 percent of families in the study went without food, 30 percent had a utility shut off, 61 percent went without important medical care and half failed to fill a doctor’s prescription.

“The bill is written against a template that everyone has overspent, including those with breast cancer, those fighting chronic illness, those who have lost children to cystic fibrosis or other terrible illnesses,” says Warren. “It’s like responding to a cholera outbreak by closing down the hospitals.”

Whatever happens politically, the fate of medical debtors will also be shaped by several cases now winding through the courts. Last summer, law firms filed numerous lawsuits against nonprofit hospitals for overcharging uninsured patients, a practice that often contributes to bankruptcy. Attorney Richard Scruggs, who headed government lawsuits against big tobacco companies, is leading the federal effort.

On the state level, a class-action suit is pending in Illinois that involves Advocate, the source of Rose Shaffer’s troubles. In November 2003 seven former patients filed the suit, charging Advocate with imposing discriminatory pricing (the number has since risen to seventeen). There is ample evidence for their claims. In March 2003 the Service Employees International Union, the nation’s largest healthcare union and an adversary of Advocate in organizing campaigns, released a study on the collection practices of fifty-nine Cook County hospitals. Advocate, which operates six hospitals in the county, ranked worst. According to SEIU, Advocate charged uninsured patients 139 percent more than their insured counterparts and was three times as likely to sue as other local hospitals. A month after the report’s release, Advocate announced an increase in charity care for patients who couldn’t pay. But for Rose Shaffer and others, it was too late. Later that year SEIU and Barack Obama brought Shaffer to Springfield to tell her story to the State Assembly.

“Advocate fails to provide automatic charity care discounts to the poor, and as a result the uninsured are still victimized by aggressive pricing and collections tactics,” says Joseph Geevarghese, director of SEIU’s Hospital Accountability Project. Advocate, which says it offers among the nation’s most generous charity care, filed a motion to dismiss and a counterclaim against SEIU, accusing the union of defamation. The motion was denied last November, but Advocate plans on refiling. The lawsuit will likely be tried this year.

Still, University of North Carolina associate law professor Melissa Jacoby, who testified before Congress last summer on how hospital collection practices can cause bankruptcy, doesn’t think litigation on its own will right the system. “Hospitals with the most egregious practices certainly should clean up their acts,” she says, “but millions of people will still experience medical-related financial problems and their consequences, including debt collection and bankruptcy.”

Jay Westbrook, a University of Texas law professor who co-wrote the 1981 bankruptcy study, believes bankruptcy patterns are an indicator of other social problems–high unemployment, rising divorce rates (people often file for bankruptcy after a divorce) and, in this case, a crumbling healthcare system. “Bankruptcy occurs when there is a crisis. That’s what it’s there for,” Westbrook says.

A study by the Center for Studying Health System Change shows that 20 million families struggled with medical debt in 2003. Federal projections suggest that out-of-pocket health expenses will rise at least until 2013. Elizabeth Warren and Steffie Woolhandler foresee medical bankruptcies continuing to climb as the uninsured population swells, overburdened hospitals aggressively collect to meet the bottom line, prescription drug prices increase and employers shift medical costs to employees.

The only real cure for the medical bankruptcy epidemic, according to Physicians for a National Health Program, is national health insurance–a system where coverage isn’t linked to employment and medically necessary care is accessible to all without deductibles or copayments. If such sweeping reform seems a long way off, there are short-term fixes too. One would be to exempt medical debtors from any new laws restricting bankruptcies. “The bankruptcy courthouse doors must stay open for those who really need it,” says Warren. Another worthwhile improvement, notes Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, would be to better protect the homes of medical debtors; many states allow people only a small amount of home equity after they’ve gone bankrupt.

But even modest measures to protect medical debtors face an increasingly unforgiving environment. Although the recent litigation will likely force some hospitals to rethink collection practices, there’s evidence they are finding other ways to reclaim money, like pushing debtors toward lenders and hospital-sponsored credit cards. And the bankruptcy reform pending in Congress could hurl many more middle-class Americans into lifelong debt.

Rose Shaffer, for one, is still reeling. She works two nursing jobs, seven days a week for nearly sixty hours, so she can make the monthly $2,088 in Chapter 13 payments she still owes. Advocate has yet to claim its portion, but Shaffer’s credit is severely damaged and will be for the next decade. She’s praying her eleven-year-old car will make it through the Chicago winter.

“Sometimes I would start crying. I wished I was dead, but I was too big a coward to kill myself,” Shaffer says. “I never thought my life would end up like this.”