The popular image of a Chapter 7 bankruptcy might be a large company like Enron failing, or maybe some lazy drifter trying to shirk their financial responsibilities. The reality is anything but those sorts of images. Today in America, the most common reason for bankruptcy is to discharge egregious sums of medical debt , which might have been incurred in a short stint in a hospital emergency room.
Bankruptcy allows people to get out from under a debilitating and permanent state of financial crisis — assuming one can afford it. Applying for bankruptcy itself costs money, potentially thousands of dollars depending on the attorney used. The cruel irony is that the people who can least afford to apply are those who are most locked out from the help they need.
Upsolve, one of the three nonprofit tech startups in Y Combinator’s current winter batch, is building a unified and efficient software product to allow users easy access to the bankruptcy system. Users go through a series of questions to collect the required information about their financial circumstances, then Upsolve provides automated bankruptcy forms reviewed by an Upsolve attorney — all for free.
“Our mission is to help the victims of our broken financial system,” Upsolve CEO and co-founder Rohan Pavuluri said to me. “If you are poor, you don’t have access to the same rights.” He describes Upsolve as “TurboTax for bankruptcy” (although to be clear, TurboTax is a for-profit business line of Intuit). Much like tax, bankruptcy is convoluted. “There are 23 forms to file for bankruptcy,” he said.
So far, the software platform seems to be finding traction. Since starting the org in summer of 2016 and launching their pilot in early 2018, Upsolve has processed $16 million in bankruptcies on behalf of 400 people and has diagnosed debt problems for 5,000 users during 2018, according to Pavuluri. We’re “automating a $40,000 check to these folks… for three hours’ worth of time.”
Unlike legal processes like estate planning, which are burdened with handling 50 different state processes, bankruptcy is based on federal law, which means that Upsolve’s solution can work across the country. Today, it supports 47 states, and the startup’s first target markets are New York and Illinois.
Where Upsolve gets really interesting is on the financial side, both in how it approaches revenues from users and also how it funds its operations.
On the revenue side, Upsolve is free. Inspired by GoFundMe and other startups, Pavuluri and his team have created a model where users donate “what they think is fair” for the service. That has worked so far, as “on a unit basis we cover our costs from the tipping model,” he said.
Over time, he hopes to break even using just the tipping model, but today the organization relies on legal aid funds to partially fund its operations. The U.S. government and many state governments have funding set aside to finance civil legal aid, and the Legal Services Corporation is the largest funder to date of Upsolve.
I asked about whether incumbent lawyers are threatened by Upsolve. Pavuluri said that most lawyers don’t want to handle these cases in the first place, because they are not profitable and generally need to be handled pro bono. He said that for simple Chapter 7 cases, you (almost certainly) don’t need a lawyer, and “we challenge legal exceptionalism in that sense.” He has spent the last two years criss-crossing the country meeting with bankruptcy groups, judges, bar associations and attorneys to undergird support for the startup’s work.
 There is a large academic debate on how many bankruptcies are triggered by medical debt. The percentage varies hugely between different studies (from say 4 percent to 62 percent), and it really depends on how you define someone’s lead cause of bankruptcy. Most filers with medical debt also have other forms of debt, so what specifically triggered a bankruptcy? Due to stigma, filers will often point to medical debt when other forms of debt may be larger.
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