Can medical bankruptcy help with medical bills?

If you’ve ever filed for bankruptcy protection, there’s a good chance that medical expenses were a big reason why. 

For instance, nearly three-fifths of debtors in a 2019 NIH study either very much, or somewhat, agreed that medical expenses contributed to their bankruptcies. 

Still, the term “medical bankruptcy” is more descriptive than technical. The bankruptcy process cannot limit itself to one type of debt; it applies to all of your finances. Your medical bills are lumped in with all of your debts. 

While bankruptcy protection can provide relief for those with medical debt, it also comes with negative consequences, including your ability to access credit. That means it shouldn’t be used without serious consideration.

What is medical bankruptcy?

Medical bankruptcy isn’t a specific form of bankruptcy. It’s an informal term for when you use bankruptcy to discharge debt incurred from a medical-related financial hardship, like injury and illness. 

More than half of adult Americans (56%) have some medical debt and a nearly quarter of the population (23%) owe more than $10,000, according to a recent study by Affordable Health Insurance, a health insurance information site. 

“It’s not just about the actual medical bill,” said John Rao, an attorney with the National Consumer Law Center. “It’s also all the other bills that can’t get paid while you deal with medical debt. It’s the loss of income if you lose your job due to an illness.”

Understanding medical debt 

Medical debt can take many forms; it doesn’t always show up as a hospital bill. 

People often use credit cards to pay a medical bill and then can’t pay off their credit card. Some homeowners take out a second mortgage to pay for a procedure. 

“Medical debt is different from other types of debt because no one chooses to get sick or be in an accident,” said Allison Sesso, CEO of RIP Medical Debt, a nonprofit focused on the elimination of personal medical debt. 

Many Americans either don’t have enough or any health insurance coverage, which increases their chance of having out-of-pocket costs. The U.S. Census reports that 27.2 million people in America are uninsured. 

“Health care is extremely expensive in this country and it’s also difficult for people to save enough money to cover the costs of a medical shock,” said Pamela Foohey, professor of law and expert in bankruptcy at Cardozo School of Law in New York City.  

The charity of strangers can’t keep up with the costs, either. 

The American Journal of Public Health found that only 12% of GoFundMe crowdfunding campaigns that asked for help with medical costs actually reached their goal between 2016 and 2020. Of the nearly 438,000 requests for help with medical costs, 16% received no donations. 

How filing bankruptcy works for medical debt

Bankruptcy allows you to clear some, if not all, unsecured debt, which includes medical bills, credit card debt and personal loans. This can be extremely helpful for Americans who can have several types of debt from one medical emergency.

Some tax bills, some types of student loans and child support are also considered unsecured debt, but typically can’t be eliminated through bankruptcy. 

To best determine your path forward, you must attend credit counseling before filing for bankruptcy relief. There are two main types of bankruptcy built for citizens: Chapter 7 and Chapter 13. 

Chapter 7 bankruptcy 

Also called liquidation bankruptcy, Chapter 7 involves a court-appointed trustee selling your assets in order to pay off as much of your debt as possible before discharging the rest. 

There is a legal pecking order that decides which creditor gets priority claim to any funds. Unsecured debt, like hospital bills, is generally low in priority and often gets discharged rather than paid.

However, Chapter 7 is only available if you pass the bankruptcy means test, showing that your income can’t feasibly cover your debt payments. It’s the more severe type of bankruptcy as your home and your vehicle could be included in the assets sold, depending on the laws in your state.  

Chapter 13 bankruptcy 

If you don’t pass the means test or you want to keep assets that would otherwise be liquidated in a Chapter 7 bankruptcy, consider Chapter 13 bankruptcy. 

Also known as reorganization bankruptcy, in this chapter, you create a three-to-five-year repayment plan that’s approved by the court.

Your plan must be practical and must pay enough over the entire term to cover at least all of the priority debt claims (some or most of which may not apply to you):

1. Child and spousal support.
2. Administrative expenses from bankruptcy.
3. Wage and employee benefit plan claims.
4. Farmer and fisherman claims.
5. Customer deposit claims.
6. Tax claims.
7. DUI claims. 

Your payment must also be enough to pay down the debt of assets you want to retain, such as a house or car. 

If the court approves your plan, you make payments to a trustee who disburses the funds to creditors. During this period, creditors aren’t allowed to contact you and you’re not allowed to take out any additional loans or credit and must strictly adhere strictly to the plan’s terms, making full, on-time payments. 

Once you successfully complete the repayment plan, any remaining eligible debts may be discharged. 

Is medical bankruptcy a good choice?

Bankruptcy can relieve financial pressure by erasing existing debt. It can provide a blank slate for you to start over. It can be the right choice if you’re simply overwhelmed by debt. 

If your only debt is solely medical bills, however, completely wiping your finances via bankruptcy may not be your best option. You’re not guaranteed to be approved for bankruptcy, filing isn’t cheap and the process can take months (or even years). 

“It’s only a viable option when it’s your last option, which means it’s not really that viable,” said Foohey. 

And the repercussions to your credit score are typically severe, potentially dropping by hundreds of points. Even as you repair your credit, bankruptcy stays on your credit report for seven to 10 years.

But there are other protections for Americans with medical debt.  

Last year, the three main credit reporting agencies, Equifax, Experian and TransUnion, enacted some reforms. Medical debt that’s less than a year old, medical debt that’s less than $500 and medical collection debt that has been paid will no longer be included on a credit report. 

Alternatives to bankruptcy for getting rid of medical debt

First, ensure that all the debt is actually yours. Ask for a detailed billing statement and carefully review it for any errors. A debt validation letter can help too. 

Talk with your healthcare provider

When you’ve confirmed that all the debt is correct, ask your medical provider about different payment options. Most will offer discounts for upfront payment or help you set up a payment plan. In some cases, you may qualify for debt forgiveness.

“Nonprofit hospitals are required to offer policies that allow for free or discounted care, though policies vary by hospital,” said Sesso. 

All tax-exempt hospital organizations must have a financial assistance policy (FAP), and roughly half of U.S. hospitals fall in this category. 

Find an assistance program

Government and community services are available for those struggling with medical debt. 

• Consumer assistance programs (CAPs). These can help you with health insurance issues (so you get the benefits you’re paying for) and help you find the right coverage.
• The Centers for Medicare & Medicaid Services. You can find resources, submit complaints and get help about surprise medical bills.
• Veteran programs. You can request VA financial hardship assistance and search the National Resource Directory. 
• State agencies. Your state attorney general may offer legal and financial resources, and your state insurance department can provide guidance on insurance matters. 
• Federal agencies. The Consumer Financial Protection Bureau (CFPB) offers advice on dealing with medical bills.

Ask for charity help

National organizations including HealthWell, the Patient Advocate Foundation and the Patient Access Network (PAN) Foundation help people afford critical medical care. Regional and local organizations may be available to pitch in as well. 

“Having debt or even being afraid of accruing medical debt keeps people from receiving the care they need,” said Sesso.  

If you’re unsure where to start, the nonprofit Dollar For can help you select and apply for various programs. 

Consider a debt management plan or a debt consolidation loan

Nonprofit credit counseling services can work with creditors on your behalf and even get you more favorable terms on your existing debt. Debt management plans (DMPs) can simplify and empower you to pay off your medical debt; however, your creditors must agree to participate. 

If you have multiple debts and your creditors don’t want to participate in a DMP, you might get a debt consolidation loan instead. While you’ll be taking out a new loan to repay your old ones, debt consolidation can lower your interest rates and help you pay down your debt faster.

Frequently asked questions (FAQs)

How do I discharge medical debt in bankruptcy?

Your medical debt can be discharged as part of the normal course of bankruptcy. The bankruptcy court will consider your medical debt as part of your overall finances. The court can’t consider your medical debt as a separate matter and discharge it separately. 

What is the medical debt relief act?

The medical debt relief act would change how medical debt is recorded on credit reports. The bill, which hasn’t passed yet, proposes that if the medical obligation is less than a year old, fully paid or settled, it won’t show on a credit report.

Perhaps inspired by, but independent of legislation, the three main credit reporting agencies have already enacted some change. As of July 2022, only medical debt that’s older than one year, more than $500 and still unpaid will be on a credit report. 

The act of legislation could still be useful as it would ensure that the reporting agencies are legally required to follow such practices, rather than doing so only voluntarily. 

How do I qualify for a medical bankruptcy?

“Medical bankruptcy” is a description rather than a legal term. If you’re considering bankruptcy due to medical-related debt, you qualify for it in the same way you’d qualify for “regular” bankruptcy.

What percentage of adults file medical bankruptcy?

About 66.5% of bankruptcies are caused by medical debt, or about 530,000 cases a year.

Should I worry about my medical bills in collections?

While it’s always a good practice to pay for a service you used, medical bills won’t show up on your credit report if the bill is less than $500 or less than a year old. Here’s information on your medical bill rights and protections.