Bankruptcy and Medical Bills: Managing Healthcare Debt in Tough Times

Medical debt affects nearly everyone, but it can be especially burdensome for those with chronic illnesses that require long-term hospitalization and time away from work. According to the Consumer Financial Protection Bureau (CFPB), Americans had amassed $88 billion in medical debt as of mid-2021, a figure reflected on credit report data. 

Although most medical debt collection items are around $500, many consumers have multiple such items on their credit reports. In fact, past-due medical debt is the leading cause of personal bankruptcy. 

If you are experiencing crushing medical debt, you may also be wondering if there is a solution. For example, can you get rid of your debt by filing for personal bankruptcy? This is one option that many people pursue. 

The Impact of Medical Debt on Households and the Economy

According to a Kaiser Family Foundation (KFF) analysis, medical debt is a consistent problem despite more than 90% of the U.S. population having some form of health insurance. For individuals with limited means, even a small medical expense or emergency can be unaffordable. And people with significant expenses are likely to build up major debt over time. 

A KFF survey revealed that people with medical debt often cut spending on other items like food and clothing or depleted their savings to pay mounting medical bills. This is not only a personal hardship but also a societal harm. When individuals and families can’t afford the necessities due to medical debt, they also won’t spend money on other things like eating out, vacations, or buying a home. 

Using Personal Bankruptcy to Wipe Out Medical Debt

It’s not uncommon for people to file for personal bankruptcy when they are struggling to pay medical bills. A bankruptcy will eliminate debts from hospitals, doctors, ambulances, pharmacies, and other medical providers. It will also address other qualifying debts like personal loans, credit cards, utility bills, leases, and more. 

Unsecured Debt in Bankruptcy

When you file for bankruptcy, the distinction between secured and unsecured debt is important. Secured debt is anything backed by collateral, such as a loan on a vehicle or a home mortgage. While bankruptcy can wipe out the debt, the lien usually survives bankruptcy, meaning the lender can repossess a vehicle or foreclose on a home. 

However, medical debt doesn’t have any collateral. Similar to credit cards, it is considered unsecured debt. When this debt is discharged through bankruptcy, it is gone forever. Further, filing for bankruptcy gives you an automatic stay, which means providers and collectors can no longer contact you or pursue collections. 

Medical Bills and Chapter 7 Bankruptcy

Chapter 7 bankruptcy is one type of personal bankruptcy you can use to eliminate medical debt. If you owe a lot of debt, you likely won’t have any problems meeting the means test. You may need to forfeit some non-exempt assets, which the bankruptcy trustee will liquidate to repay the debts. However, many people who file for Chapter 7 bankruptcy are able to hold onto essential assets like their family home and vehicles. Before filing for bankruptcy, it’s important to understand these options and your rights. 

Medical Bills and Chapter 13 Bankruptcy

Chapter 13 bankruptcy is the other option if you are considering personal bankruptcy. This requires that you create a three to five-year debt repayment plan, which would have a single reduced payment that is divided among your creditors. If you successfully complete the repayment plan, the remainder of your debts will be fully discharged. Many people choose Chapter 13 bankruptcy when they can’t meet the Chapter 7 means test or they have non-exempt assets they wish to keep. 

Alternatives to Bankruptcy to Address Medical Debt

Personal bankruptcy isn’t the only option for addressing medical debt and other unsecured debt. Some people choose debt consolidation, which involves taking out a loan with a fixed monthly payment to pay off all of your outstanding debt. But, if the interest rate is higher than what medical providers are charging, this may not make sense. 

In some cases, you can also negotiate directly with a medical provider to settle outstanding debt. These businesses recognize that it’s better to receive some payment than nothing at all. The provider might waive a portion of the debt if you offer to make a reasonable lump sum payment.

Finally, some state lawmakers are also attempting to address the medical debt crisis. For example, at least a dozen U.S. states are considering legislation to create medical debt relief programs or protect personal property from medical debt collectors. 

Bankruptcy is one of the many debt relief options for managing healthcare debt in tough times. But you don’t want to jump into a complex legal process before you understand the facts. A knowledgeable bankruptcy attorney can explain your options and guide you through this process. This will ensure you make sound financial decisions that can carry you through into the future.