Understanding Bankruptcy

Can You File For Bankruptcy Over Medical Debt?

Health care isn’t cheap in the United States, and medical expenses can spell financial trouble for families and individuals even if they have health insurance.

Many times, bankruptcy is due to multiple factors. Medical bills may be part of the equation but not necessarily the tipping point. But there is no doubt that large medical bills can contribute to the need for a bankruptcy filing.

Here’s a look at how heavily medical bills weigh on Americans and whether you should file for bankruptcy over them.

Medical costs and their burden on Americans

Filing for bankruptcy over medical debt

Are you eligible for bankruptcy?

Is bankruptcy right for you?

FAQs

Medical costs and their burden on Americans

A pair of Kaiser Family Foundation polls in 2017 illustrated the problems Americans have when it comes to medical expenses. Twenty-nine percent of respondents reported problems paying medical bills. These same polls found that the inability to afford health care has led Americans to delay or skip medical tests, treatments or care in general. For example:

  • 27% said they have put off or postponed getting health care
  • 23% said they skipped a recommended medical test or treatment
  • 21% said they didn’t fill a prescription because of the cost

A separate 2016 study by the Kaiser Family Foundation and The New York Times found that, among insured people, 20% of working-age Americans had trouble paying medical bills in the past year. While that doesn’t mean they all filed for bankruptcy, it means that medical bills are an issue for the average American.

Overdue medical debt is common, too. A survey conducted by the Consumer Financial Protection Bureau in 2017 found that past-due medical bills were the most commonly cited debt for which debt collectors contacted consumers. Fifty-nine percent of respondents said they had been contacted about a past-due medical bill.

There have also been more granular studies to check on the impact of medical bills on financial status. A study titled “The Economic Consequences of Hospital Admissions” published in American Economic Review in 2018 came to the conclusion that hospital admissions are associated with an increase in consumer bankruptcy. According to the study, four years after people are hospitalized, the probability of them filing for bankruptcy goes up 0.4 percentage points, or about 33% relative to the annual bankruptcy rate of 1.2%.

Filing for bankruptcy over medical debt

While there is a strong connection between medical expenses and bankruptcy, it’s important to note that there’s no such thing as medical bankruptcy. When someone files for bankruptcy, it’s for all their debts, not just ones related to their medical expenses. That’s why someone’s financial health must be considered if their medical expenses are becoming unbearable and they’re thinking about bankruptcy.

There are two forms of personal bankruptcy: Chapter 7 and Chapter 13.

In a Chapter 7 bankruptcy, a debtor’s assets are sold and the proceeds of that sale are used to pay creditors. In a Chapter 7 bankruptcy filing, medical debt is an example of the unsecured debt that could be wiped out.

A Chapter 13 bankruptcy is more complicated. It is often called a “wage earner’s plan.” This type of bankruptcy allows an individual with regular income to set a three- to five-year plan to pay back all or part of their debt through a repayment plan. During the repayment plan, creditors may not start or continue collection efforts.

Chapter 13 is often attractive to people because it offers the possibility of letting a person save their home from foreclosure, something not always possible in a Chapter 7 bankruptcy.

Are you eligible for bankruptcy?

Before an individual can file a Chapter 7 bankruptcy, they have to pass a means test to show the court that this wouldn’t be an abuse of bankruptcy.

A means test is a complicated calculation that helps determine if you have the means to repay some of your debts. If it’s determined that you do, then you won’t qualify for a Chapter 7 bankruptcy. If the debtor’s monthly income over five years is more than $12,850, or 25% of the debtor’s nonpriority unsecured debt of at least $7,700, a bankruptcy may be found to be an abuse. A debtor does have the chance to challenge the finding.

An individual is eligible for Chapter 13 relief as long as their unsecured debts are less than $394,725 and secured debts are less than $1,184,200. The medical debt would fall into the unsecured debt category because it is not backed by an asset.

Is bankruptcy right for you?

So how do you know if filing bankruptcy because of medical bills is right for you? How and why you accrued those medical bills might provide an answer.

For example, if you have an ongoing health condition and no medical insurance or inadequate medical insurance, it may not make sense, said John Rao, an attorney with the National Consumer Law Center in Boston. “If you file bankruptcy now, it may not be all that helpful since in two years you could find yourself in the same situation,” he said.

Medical debts accumulated after you file for bankruptcy will still be sent to collections. The bankruptcy only covers your medical debt up to filing, Rao said. “The next day, if you had to go to the hospital and incurred $20,000 in medical bills, it’s not dischargeable,” he added.

But with a Chapter 13 bankruptcy, you can seek court approval to include new debt that you’ve incurred post-filing into your payment plan. Examples include if you need to buy a new car or you have new medical expenses.

Because a bankruptcy will negatively affect your credit for years to come — it remains on your credit report for seven years if you file Chapter 13 and 10 years if you file Chapter 7 — it’s important to consider alternate options first. Think about negotiating a payment plan or reduced debt with your creditors. Talk to a credit counseling agency. You might also consider debt consolidation, which means rolling all your unsecured debts such as credit card and medical bills into one new loan, or liquidating your assets to pay off your debt.

If you decide bankruptcy is your best recourse, the first step is to reach out to a bankruptcy attorney. Some bankruptcy attorneys will offer a free consultation as a first step before filing. If you’re considering a Chapter 7 filing, you will have to pay an attorney upfront. The costs of hiring an attorney to file a Chapter 13 bankruptcy can be worked into your repayment plan.

“It’s no different than any other bankruptcy,” Rao said. “Medical debts are unsecured debts, so they don’t have any special treatment under the bankruptcy code.”

FAQs

There still may be some uncertainties about how bankruptcy works with medical debts. Rao suggested consulting an attorney with even the most basic questions.

The bankruptcy attorney that you choose should have familiarity with the area in which you are filing, and perhaps any other intricacies of your case that could help address some of your specific concerns. But here are some things that might come to mind when you’re considering filing for bankruptcy because of significant medical debt.

What happens to my doctor if I file bankruptcy? Can I continue to see him?

According to Rao, it’s unlikely that a doctor would refuse to treat you after a bankruptcy. “That is really rare,” he said. Some extenuating circumstances might be if you have racked up quite a bit of debt and are dealing with a doctor in a rural area.

“That’s something to talk to the attorney about based on the local community,” Rao said. “You rarely hear about this being a problem.”

There are also laws that prohibit doctors from discriminating against potential patients because of a bankruptcy.

What if I will continue to incur medical bills in the future?

If the medical bills are new, they can still be subject to collections because they are not covered under a Chapter 7 bankruptcy filing. With a Chapter 13 filing, you may be able to get court approval to include new debt in your payment plan after your filing.

When is the best time to file for bankruptcy because of medical debt?

“You could be almost worse off if you file too early if you don’t address the problem,” Rao said. The main problem for most clients staring down bankruptcy due to medical debt is insufficient insurance to deal with future problems. You need to have adequate insurance and not be incurring medical bills before you will feel relief from bankruptcy, he said.

“When you are still incurring lots of debt and still in deep financial trouble, it doesn’t make sense to file,” he said.