does bankruptcy clear medical bills

UPDATED: September 23, 2021

Medical debt has long been a common problem in the United States. Medical debt statistics in 2019/20 revealed that about 20 million Americans have a total of $45 billion worth of medical debt in collections. It’s no wonder why many people go under because of medical bills and unmanageable health care costs.

A lot of people file for bankruptcy due to a job loss, divorce, or separation. Does bankruptcy clear medical bills, too? The answer is yes. Filing for bankruptcy can wipe out your medical bills.

You’re probably wondering what percentage of bankruptcies are caused by medical bills. In 2019, 66.5% of all bankruptcy proceedings were related to medical issues and about 530,000 families sought out bankruptcy relief every year because of medical problems and debt.

Can You Get Rid Of Your Medical Bills By Filing For Bankruptcy?

Yes, you can get rid of your medical debt by filing for bankruptcy. There’s no specific bankruptcy proceeding that deals with medical debt alone. However, this legal process can offer you medical debt relief because it’s considered a non-priority unsecured debt. It can also discharge other debts, including:

  • Overdue cell phone and utility bills
  • Overdue rent payments
  • Debts to family and friends
  • Personal loans
  • Credit card debt

What Type Of Debt Is Medical Debt?

Medical debts fall under the non-priority unsecured debt because they’re not secured by collateral. Lenders must take legal action, win the lawsuit, and secure a judgment before they can take your property to pay your medical bills. 

Whether you file a Chapter 7 or Chapter 13 bankruptcy, medical debt goes at the bottom of the list of debt that needs to be repaid. In most cases, medical debt is discharged, which means it doesn’t get repaid at all.

What To Do If You Get Sued For Medical Debt?

Nobody wants to get sued. Dealing with unpaid debt is a problem already and facing a lawsuit will only make things worse. Here’s what you should do if you’re getting sued for medical debt:

  • Find out who the debt belongs to.
  • Never ignore a lawsuit, regardless of the type of debt you owe. Consult a lawyer so that you’ll know how to proceed.
  • Try to negotiate with the doctor, medical facility, or debt collector for a more favorable repayment plan.
  • Prepare for the court proceedings. Don’t forget to get legal representation.
  • Know your rights. Did they inform you about the lawsuit? Were you served with the notice properly? If not, you can use these as part of your legal defense.
  • Understand wage garnishment so that you’ll know what to expect if you lose the case. If the judge rules against you or if you failed to answer the lawsuit, the court may issue an order that allows the lender or collection agency to garnish your wage.
  • Look for financial assistance programs.
  • Consider filing bankruptcy.

Which Type Of Bankruptcy Chapter Should You Use To Get Rid Of Medical Debt?

Before anything else, you need to remember that bankruptcy will leave a significant effect on your credit report, which will last from 7 to 10 years. It’s a decision that should not be taken lightly. Chapter 7 and Chapter 13 bankruptcy can help get rid of your medical debt. But the processes involved are different for each type of legal proceeding.

If you don’t have a regular or stable income and your assets have little to no equity, a Chapter 7 bankruptcy may be a good option. There’s no cap to the number of debts you need to have. Plus, it’s a good solution if your goal is to get rid of your medical-related debt.

Meanwhile, Chapter 13 is best if you didn’t qualify for a Chapter 7 bankruptcy. If you have a stable income and there are assets that you don’t want to lose, then this option is for you. 

The bankruptcy court will issue a repayment plan that lets you make affordable payments to your debt, including your medical bills. Once the plan ends, the court will discharge all of your remaining debt.

How Is Medical Debt Treated Under Chapter 7 Bankruptcy?

Under Chapter 7 Bankruptcy, the trustee won’t prioritize your medical bills when paying off your debt during the bankruptcy proceeding. Any outstanding medical debt usually ends up forgiven even if the trustee manages to set aside a certain amount to make a partial payment for your medical bills.

Chapter 7 can discharge any amount of medical-related debt as long as you’re eligible, which is determined by passing the means test. The bankruptcy means test determines if your income falls below or above your state’s median income level.

This type of bankruptcy proceeding lasts between four and six months. During this period, you may lose some of your property, especially if they’ve been used as collateral for your loans. The trustee may sell your assets and use the proceeds to pay back your creditors.

Some assets may be exempted, such as welfare benefits, Social Security benefits, and unemployment compensation. Eligible debts are forgiven or discharged once the bankruptcy proceeding ends. Chapter 7 gives you debt relief, but it will stay on your credit report for up to 10 years.

How Is Medical Debt Treated Under Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy can help make repaying your debt more manageable. The court will provide a debt repayment term, which lasts from three to five years. It involves making monthly installments, which are less than 15% of your disposable income.

Unlike Chapter 7, Chapter 13 bankruptcy may last for several years, and it has a limit on secured and unsecured debts, which are $1,257,850 and $419,275, respectively.

You must have a regular disposable income so that you can pay back your loans according to the court-mandated payment plan. Debts are separated into priority secured debts and non-priority unsecured debts. Overdue taxes, domestic support obligations, mortgages, and car loans fall under priority secured debts.

Meanwhile, credit card debt balances and medical-related debt don’t receive priority. Since they’re unsecured, you may pay only a portion of them under the Chapter 13 plan. At the end of the repayment period, any remaining balance on your medical debt, unsecured loans (including personal loans), and secured loans will be wiped out.

What Are The Consequences Of Filing For Bankruptcy?

  • You may lose your property, including real estate, antiques, jewelry, and vehicles. The court may require you to sell your assets to repay your debt under Chapter 7.
  • The people who co-signed your loan may be held partly accountable for your debt if you file for bankruptcy.
  • Bankruptcy will leave a negative mark on your credit report for up to 10 years. It will affect future financial transactions, such as being charged higher interest rates, less favorable loan terms, or worse, rejection of your loan application.
  • You may find it difficult to secure mortgage approval. If lenders accept your application, you’ll be required to pay a higher down payment and interest rate.

What Are The Alternatives To Filing For Bankruptcy?

1. Negotiate With Your Medical Provider

Some medical providers may agree to a settlement. Ask if you could get lower repayments if you manage to provide a lump sum payment. You can also ask if you could agree on a new repayment plan with more favorable terms, such as lower payments over a longer period.

2. Apply For Assistance Programs

Many hospitals offer assistance programs to cash-strapped patients. You can also check with local charities for financial support.

3. Check Your Bills

Double-check your medical bills. Make sure that all the entries are correct and that you’ve authorized all the medical examinations or procedures performed. Your medical bills should also show that your health insurance provider settled all your covered medical expenses.

4. Consider Debt Management

Find a non-profit credit counseling agency that can help you with debt management. They can suggest a repayment plan to your creditors and convince them to offer you reduced charges.

5. Consolidate Your Debt

If you owe money from different lenders, debt consolidation could be a good option. It allows you to combine all of your other debts into a single loan. The total amount of debt will be the same, but you may get a better interest rate and repayment terms.

6. Transfer Your Debt To A Credit Card With A Lower Interest Rate

Look for credit card providers that offer low interest and transfer rates for new or existing clients. They could help you save on fees, penalties, and other additional charges that pile up because of your outstanding medical debt.

7. Seek Assistance Through Crowdfunding

You might be able to gather some funds from crowdfunding platforms to support your medical needs. Some websites where you can start a fundraising campaign are GoFundMe, JustGiving, and CoFund Health.

Is Bankruptcy The Best Option To Eliminate Medical Debt?

Although the idea of getting rid of all your medical debt may be tempting, you need to consider carefully if filing for one is your best option at the moment.

Do you think you’ll most likely experience financial hardship in the future? If yes, then medical bankruptcy might not be a good solution. Take Chapter 7 bankruptcy for example. If you get a discharge, you’ll have to wait for eight years before you can get another. It means you’ll have to deal with all your debt if you face financial distress during that period.

If you don’t have any property or only have income or assets that fall under exempted assets, creditors cannot garnish your wage or seize your belongings. You don’t need to file for medical bankruptcy if that’s the case.

If your financial hardship is temporary, check if you can wait out the statute of limitations (duration a creditor can sue you and get a money judgment against you) in your state. Once it expires, creditors can no longer force you to pay the debt. However, if you choose this route, the outstanding debt will negatively affect your credit report.

Bankruptcy and Medical Bills In Summary

Many people turn to Chapter 7 and Chapter 13 bankruptcy to clear their medical debts. Choosing which type of bankruptcy is appropriate depends on your current financial situation. Before you make any decision, be sure to do your research first or consult a bankruptcy attorney. Keep in mind that filing bankruptcy can wipe out your unpaid medical bills, but it will negatively affect your credit score. Try alternatives to get rid of your medical debts first before filing bankruptcy.