What You Need to Know Before Filing a Medical Bankruptcy

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Healthcare costs are rising in the U.S. and are believed to be one of the biggest expenses Americans have to pay. Americans spent $3.6 trillion on medical care in 2018.

As of July 2020, a Gallup poll found concerns rising nationally about bankruptcy arising from a significant health event. In addition, the poll found 15% of adults report that at least one person in their household currently has medical debt that will not be repaid—either in full or in part—within the next 12 months. 

Even with health insurance, high deductibles and copays, plus job loss, affect Americans. 

With the average healthcare cost per person reaching $11,172 in 2018, the Centers for Medicare & Medicaid Services predict that national health spending will reach $6.2 trillion by 2028.

So if you are swimming in unpaid medical bills and feeling like you’ll never be able to pay them off, you’re not alone. In fact, outstanding medical costs are a huge contributing factor in many personal bankruptcies. Although it is difficult to determine just how many bankruptcies are triggered by medical debt, some studies have tried to determine just how much healthcare factors into this last resort. At least 26% and as many as 62.1% of bankruptcies include significant medical debt.

If you’re thinking about filing a bankruptcy case for medical bills, here’s what you need to know.

Can You File Bankruptcy on Medical Bills Only?

No, there is no such thing as a “medical bankruptcy”. Even though you’re filing a bankruptcy case to get rid of overwhelming medical debt, you won’t be able to limit the case to just outstanding medical bills. The bankruptcy laws are designed to be as fair as possible to the debtor (the person who files the bankruptcy case) and to the creditors.

Medical debt is considered the same as credit card debt, old utility bills, personal loans, and money borrowed from friends and family. These are all similar enough that the bankruptcy code treats them the same way. Therefore, if you’re filing a case to get medical debt relief—what we call a discharge—you’ll also eliminate those other unsecured debts, too.

In fact, bankruptcy is not a “pick and choose” project. When you file a case, you’re required to list all your debts, personal property, and real estate. You must disclose all your family income and every family expense, even if your spouse will not be filing bankruptcy with you. You’ll also provide other details of your financial life like your marital status, recent debt payments, and recent property transfers or sales.

Most people file one of two types of bankruptcy—Chapter 7 or Chapter 13. Bankruptcies will stay on your credit record for anywhere between seven to ten years.

Chapter 7 Bankruptcy

Chapter 7 is straight bankruptcy. The process lasts about four to six months. In the end, if all goes well, you’ll receive a discharge or forgiveness of your debts.

Not all debts in a bankruptcy case are dischargeable. Some, like recent income taxes, past-due child support, and alimony cannot be discharged and will survive the bankruptcy case. Some, like student loans, can be discharged under very narrow circumstances.

For secured debts, like car loans and mortgages, if you want to keep the property, you’ll have to continue making payments after the bankruptcy case for medical bills is over.

So, what happens to your property in a Chapter 7 case? Don’t worry. You’re allowed to keep your property if you can claim an exemption on it. Every state has an exemption list with types of property and maximum values. A few states let you use an exemption list in the bankruptcy code itself.

If you have any property you can’t exempt, you’ll have to turn it over to a trustee appointed by the bankruptcy court to administer your case. The trustee will sell the nonexempt property and distribute the proceeds to your creditors. Having to give up property is actually pretty rare and happens in less than 5% of Chapter 7 cases.

This all sounds good, right? You can get forgiveness of all your credit cards and lots of other debt in a Chapter 7 case. But there is one issue. Not everyone will qualify to file a Chapter 7 case. Changes to the bankruptcy law by Congress in 2005 makes it more difficult for people to file this kind of bankruptcy. To qualify your family income and expenses will be subjected to something called the “means test.” If your income less your reasonable and necessary expenses are less than the median income for your state you qualify. If it’s higher, your best choice is usually to file a Chapter 13 case.

Chapter 13 Bankruptcy

A Chapter 13 case is a repayment plan that lasts from three to five years. It's also called a wage earner's plan. If that sounds unattractive, you need to know there are some very real benefits to filing Chapter 13 and making your payments through the court. Your payment amount will be based on the debts you have and your disposable income. That means you could very well pay many thousands of dollars less than you owe and still get a discharge of any remaining debt at the end of your plan. But because you are handing over much of your disposable income, you may end up living on less each month.

In both cases, you will also be required to go through credit counseling with an approved agency both before and after you file your case. The counseling sessions before are to determine whether you really need to declare bankruptcy. The counseling after filing is aimed at helping you manage your finances.

Will I Lose My Doctor if I Discharge the Money I Owe Him?

Many people are concerned about what will happen to their relationship with their doctors and other medical providers if they discharge medical debt. You may think it will be difficult to visit a trusted doctor. Congress enacted the Emergency Medical Treatment and Active Labor Act in 1986, preventing hospitals from refusing to treat patients who can't pay.

But medical providers, including your primary physician, can refuse to treat you after their debt has been discharged in bankruptcy. In reality, most will not take that drastic action, especially in the case of hospitals. They understand the need for bankruptcy and why you filed the case. Most are happy to keep you as a patient as long as you’re willing to pay the debt you incur going forward.

But, there are some providers who won’t do business with you anymore. If that happens, it may not be appealing, but you can always find another provider.

The Bottom Line

You may feel better knowing there’s no law or rule to prevent you from paying those medical bills after your bankruptcy for medical bills is over and you’re better able to afford it. It’s completely up to you who you pay and how much. If you want to pay a doctor, but not your credit card, that’s your business. (Learn about bankruptcy software.

If you feel it's possible to avoid filing for bankruptcy, you should consider seeking assistance from a debt management plan (DMP) or debt relief program. A DMP is a repayment plan arranged through a credit-counseling agency that establishes a new payment schedule and terms that can help you pay down your debt faster and more affordably. Debt relief is usually offered by for-profit companies.

Pursuing debt settlement through a company is a last resort before bankruptcy because it involves stopping payments and working with a firm that holds that money in escrow while negotiating with your creditors to reach a settlement, which can take up to four years. Withholding payments from your creditors can seriously damage your credit score.