In Sickness and In Debt: Payday Loan Use Among Bankruptcy Filers With Medical Debt

Medical debt plays a significant role in asset depletion and insolvency for Americans. Recent economic challenges, such as foreclosures and stagnant wage growth, have added a substantial financial burden for low- and moderate-income households, and these households may utilize a variety of resources to deal with rising medical costs. Cash strapped and credit constrained families may turn to small, short-term loans with exorbitant fees—payday loans—whose industry has experienced the most rapid rate of growth in the fringe banking system since the mid-1990s. Given that roughly two-thirds of payday loan customers are repeat borrowers, consumer advocates and policymakers have increasingly raised voices of concern. However, no empirical research has investigated if medical debts and payday loan debt are associated. This study examined two major hypotheses related to medical debt and payday loans: the presence of medical debt (1) increases the likelihood of payday loan borrowing and (2) increases the likelihood of repeated payday loan borrowing.

This study utilized data from a purposive sample of 746 Chapter 7 Bankruptcy files from June of years 2005 through 2011 from a United States Bankruptcy Court District in the southeastern US. Bankruptcy filers’ data uniquely provided the researchers with information about debt sources including medical debt and payday loan use. Payday loan use was a dependent variable for one model (1=use, 0=no use); repeated payday loan use was a dependent variable for another model (1=twice or more use, 0=no repeated use). The major independent variable was medical debt (1=presence of medical debt amounts exceeding either $5,000 or 10% of a filer’s annual income, 0=otherwise). The control variables included student loan debt, homeownership, income, and other household characteristics. Logistic regression with White’s robust standard errors was employed for data analysis.

The results showed that filers with medical debt had significantly higher odds of using payday loans than those without medical debt (odds ratio [OR] = 1.681, p = 0.011), holding the other variables constant. The results also showed that filers with medical debt had higher odds of using payday loans repeatedly than those without medical debt (OR = 0.504, p = 0.075) at relaxed levels of statistical significance. Filers with student loan debt, greater numbers of children, currently employed, and without homeownership also had higher odds of using payday loans.

This study found that medical debt increases the odds of payday loan use and repeated payday loan use. While the generalizability of this finding is limited to the bankruptcy filers, the findings of this study shed light on the implications for policy and further research regarding medical debt and financial fragility among Americans. Thoughtful and vigorous social work policy and practice responses should include ways to minimize financial fragility related to medical debt and ways to maximize financial stability through asset building, advocacy for borrowing from mainstream financial institutions, and education about sound financial decision-making.