Can You Declare Bankruptcy on Medical Bills?

Stressed and worried young Asian woman working from home, handling paperworks and going through her financials

When you need medical treatment, bills may be your last concern—and understandably so. Wellness is your first priority when your health is at stake. But medical bills can cause their own kind of injury, specifically aimed at your financial well-being.

If you're overwhelmed with medical bills and don't know how you'll pay them, you may wonder if declaring bankruptcy on your medical debt is a possibility. Technically, it is—but not as a standalone option. There is no such thing as medical bankruptcy, but medical debt is dischargeable through regular bankruptcy proceedings.

Is Medical Debt Dischargeable in Bankruptcy?

You can't limit a bankruptcy case to medical bills, but you can get relief from your medical debt through the bankruptcy process. In a bankruptcy, medical debt is considered non-priority unsecured debt: It's dischargeable, meaning it can be forgiven. By contrast, priority debt—such as tax bills, child support and most student loans—can't be eliminated through bankruptcy. And defaulting on a secured debt like a mortgage or car loan will result in the loss of your collateral.

If you're considering bankruptcy to help you deal with overwhelming debt—including medical bills—know that this is a major step that will have lasting implications for your credit for years to come. During the bankruptcy process, you'll work with a court-approved credit counselor and a trustee who will oversee your case. You will need to disclose all of your debts, income and property so that the court can determine what the outcome and next steps will be. Bankruptcy is complicated, so it helps to learn about the bankruptcy process before you start.

There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. Both address the underlying problem of excess debt, but the two processes differ quite a bit. Here is a quick rundown on each.

Chapter 7 Bankruptcy and Medical Debt

Chapter 7 bankruptcy is designed to help people who can't afford to repay their debts. The court will consider what you owe, your income and any assets that can be sold to help defray your debt. Chapter 7 discharges your medical debt in a matter of months, but it isn't an option for everyone. A few specifics:

  • Chapter 7 is means-based. To file for Chapter 7 bankruptcy, your income must be below your state's median for a household of your size.
  • Some of your property may be liquidated. The money received will be used to pay your creditors. Exemptions exist, but in the end you are likely to lose property in a Chapter 7 proceeding.
  • The process takes four to six months. When the bankruptcy is final, your eligible debts are discharged, or forgiven.
  • A Chapter 7 bankruptcy stays on your credit report for 10 years. During this time, having a bankruptcy on your credit report may make it difficult to get approved for loans or secure favorable rates and terms.

Chapter 13 Bankruptcy and Medical Debt

Chapter 13 bankruptcy focuses on making debt repayment more manageable. After taking into account all of your debt, income and assets, a Chapter 13 bankruptcy establishes a court-mandated plan that helps you repay some or all of your debt—including medical bills—in affordable monthly installments that do not exceed 15% of your disposable income. Additional details:

  • Chapter 13 creates a three- to five-year repayment plan. The plan is based on your debt and income levels. Some or all of your remaining debt may be discharged at the end of the repayment period, freeing you from further payments.
  • Debt cannot exceed certain levels. To file for Chapter 13 bankruptcy, you must have no more than $394,725 in unsecured debt and no more than $1,184,200 in secured debt.
  • You must have regular income. For Chapter 13 to work, you need the means to repay your loans, even at a reduced level.
  • Chapter 13 may be better for homeowners. Chapter 13 halts the foreclosure process and requires your mortgage lender to let you include your home loan as part of your repayment plan.
  • Resolution takes longer. While a Chapter 7 bankruptcy is over in four to six months after the proceedings end, Chapter 13 stretches out over years.

Alternative Options for Getting Rid of Medical Debt

You may have alternatives to bankruptcy worth exploring as well. Before throwing in the towel on your medical debt, consider the following steps to reduce it or pay it off:

  1. Audit your bills. Check for billing errors or unauthorized charges. Make sure your insurance has paid for covered expenses.
  2. Negotiate your costs. Hospitals and medical providers may be able to discount your costs, especially if you don't have insurance.
  3. Look for financial assistance options. Many hospitals have income-driven repayment plans or other types of financial assistance. Local charities may be able to help as well.
  4. Work out a payment plan with your provider. Many medical providers would prefer to work out a low- or no-interest payment plan than to send your bill to collections—or see it end up in bankruptcy.
  5. Seek out low-interest credit cards or loans. Medical credit cards often come with introductory 0% interest offers. Personal loans may be available at interest rates that are lower than what you might pay on regular credit cards.

Recovering Your Financial Health

If you've considered all your options and bankruptcy still seems like the best remedy, getting help is a good idea. Since bankruptcy proceedings often require you to meet with a court-approved credit counselor as part of the process, consider meeting with one pre-emptively to help you understand whether bankruptcy is necessary and to help you decide how to proceed. When you're ready to move forward, a bankruptcy attorney can help you navigate your way through.

Medical expenses can seriously set you back financially. When this happens, bankruptcy may be able to help you get back on the right path. It's a difficult process with significant long-term consequences, but it could offer you the opportunity to reset your finances, rebuild your credit and recover your financial health.