The Impact of Medical Debt in a Bankruptcy

The cost of health care is a major problem for many people and can be a prime contributor in the decision to file personal bankruptcy.  Bankruptcy can be a useful tool to reduce or eliminate tremendous medical bills.

Medical Debt and Bankruptcy

A 2021 Census Bureau study found nearly 1 in 5 households (20%) couldn’t afford medical care when needed. The Consumer Financial Protection Bureau reported in 2022 that whenever debt collectors contacted consumers, medical debt was the primary reason.

This correlation between poor health and financial troubles carries through to bankruptcy.  A 2000 study concluded medical bills accounted for 40% of bankruptcy filings the previous year. That was long before the Affordable Care Act, but the increase of health insurance coverage under Obamacare hasn’t made much difference. In a 2019 study of 910 Americans who filed for bankruptcy, two-thirds said their filings were tied to medical issues.

Why do an estimated 530,000 families seek bankruptcy protection from medical bills each year? Because it works!

Can You Discharge Medical Debt in Bankruptcy?

Bankruptcy generally discharges a filer’s debt. So, you should be able to eliminate medical debt in bankruptcy. Some debts cannot be discharged in bankruptcy, depending on the type of debt and the type of bankruptcy you file.

Medical bills are usually simple unsecured debts, the type that can be discharged in bankruptcy. This can be extraordinary relief for the debtor because it means the medical debt doesn’t have to be repaid.

Other Ways to Get Rid of Medical Debt

If your only debt is from medical bills, then bankruptcy may not be the best choice. For one thing, bankruptcy is hard on your credit: A Chapter 7 bankruptcy can stay on your credit reports for up to 10 years from the filing date, while a Chapter 13 can remain for up to seven years after the filing date. A bankruptcy is considered a derogatory mark that can lower your credit score, though the impact lessens over time.

Meanwhile, many credit scoring models ignore unpaid medical bills or give less weight to them. And recently, the major credit reporting agencies agreed to changes regarding medical debt.

Medical debt that was in collections but got paid off will no longer appear on credit reports, and consumers will have a grace period of one year before unpaid medical debt is listed. Medical debt of less than $500 won’t appear on credit reports at all.

So, you might consider avoiding bankruptcy and instead trying these options for dealing with hefty health care bills:

• Negotiate with the medical provider. Hospitals and other providers may take smaller amounts of cash now rather than continue with collection efforts that have an uncertain outcome.

• Enter a debt management plan. A counselor with a nonprofit credit counseling agency can help you enter a debt management plan and can negotiate with your creditors on your behalf.

• Consolidate your debt. You may be able to take out a personal loan with a low interest rate or apply for  a credit card with 0% APR and use it to pay off your medical debt. These measures can give you some breathing room, but you’ll need to make a plan to pay off your debt balance.

• Sell stuff. You might also sell some assets, like a boat or a second car, and direct the proceeds toward health care creditors. It’s sort of a modified liquidation—without the oversight of the bankruptcy system.

• Raise money. Crowdfunding is a new approach for dealing with medical debt, by requesting money from the public using an online platform. GoFundMe is especially popular with people raising money to pay medical bills. Over five years, according to one study, GoFundMe campaigns raised over $2 billion.

Bottom Line

Personal bankruptcy can be an effective way to get rid of crushing medical bills. But it may come at a significant cost to your credit profile and, potentially, your relationships with doctors and other health care providers. Chapter 7 bankruptcy can require that you give up many of your possessions, while Chapter 13 means committing to a yearslong repayment plan.

However, when your personal money situation is on life support due to medical bills, bankruptcy can represent an opportunity to return to a healthy financial state.

Consult with an experienced bankruptcy attorney to review your options and decide whether bankruptcy is right for you.