Can a medical bankruptcy get you out of debt?

Senior couple looking at paperwork and using laptopImage: Senior couple looking at paperwork and using laptop

In a Nutshell

Bankruptcy can offer a fresh start to someone overwhelmed by medical bills. But filing for bankruptcy can also affect your other debts and assets.
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Filing for bankruptcy can provide relief from medical bills, but it can also have undesirable consequences for other debts, credit scores and key assets like a house or car.

If you’re considering bankruptcy as a solution for medical debt, you’re not alone. Unmanageable medical care debt and the hardships that often come along with it — like loss of work or reduced access to credit — can be a recipe for financial ruin.

But filing for bankruptcy isn’t always an ideal solution. Although bankruptcy can help you manage or eliminate medical debt, it’s not possible to limit your claim to only one kind of debt during the process. Plus bankruptcy has a long-term negative impact on your credit and can put your assets in jeopardy.

Here’s what you should know before you file.

Medical bankruptcy: Does it exist?

“Medical bankruptcy” is not an official legal category of bankruptcy. That doesn’t mean filing for bankruptcy can’t help with your healthcare bills — it just means you don’t get to pick and choose which debts to include in your bankruptcy.

When you file for Chapter 7 or Chapter 13, medical debt is only one of the categories that may be involved in calculating your total obligations. The bankruptcy process can also affect outstanding credit card debt or your ability to stay in your home.

That’s why it’s crucial to know exactly what you’re getting into when considering bankruptcy for medical debt. Learning about Chapter 7 and Chapter 13 will help clarify what you could stand to gain — and lose — during the process.

Filing Chapter 7 for medical debt

Chapter 7 bankruptcy discharges — or releases your responsibility for repaying — certain types of debt, including an unlimited amount of medical debt.

Immediate relief

Any medical debt, including healthcare costs charged to credit cards, can be included in Chapter 7 bankruptcy.

Chapter 7 can provide immediate relief from other debt collection, too. It automatically stops most creditors from calling you or collecting money, and can even temporarily halt eviction and foreclosure processes.

Chapter 7 can be a fairly quick solution for medical debt, since it only takes around 90 to 120 days from the date you file to the date your debts are discharged. In other words, you can be free of the burden of unpaid medical bills in four months or less.

Impact on your assets

Perhaps the most severe consequence of filing Chapter 7 is the potential loss of your home and other assets. The law varies from state to state, but filing Chapter 7 can result in having your property sold in order to repay your creditors.

Impact on nonmedical debt

Chapter 7 bankruptcy eliminates many types of unsecured debt, including debt from credit cards and personal loans, so filing may not be a great solution if you hold other debts but only want to solve an issue with medical bills.

Debts not backed by property or other collateral are considered “unsecured.” Unsecured debt generally includes, but isn’t limited to, medical debt, credit card debt and certain kinds of personal loans.

Impact on your credit

Filing Chapter 7 negatively affects your credit for 10 years. Just like all forms of personal bankruptcy, it hits your credit scores harder than any other credit-related activity. But the impact to your credit scores can decrease over time.

Impact on your healthcare services

Chapter 7 bankruptcy can also affect your relationship with your doctor or make it more difficult to get medical treatment. Legally speaking, hospital emergency rooms are required by law to treat patients regardless of their ability to pay. But you could be denied care at a doctor’s office due to unpaid bills. Some people elect to pay medical debt even after filing bankruptcy to maintain a relationship with their doctors.

Filing Chapter 13 for medical debt

Chapter 13, also known as a “wage earner’s plan,” is for those who have a regular source of income. If your medical condition doesn’t fully impede your ability to earn income, this may be the best option for you.

A path to debt relief

Filing Chapter 13 can help you with medical debt by allowing you to set up a three- to five-year debt repayment plan. Monthly payments in the plan are based on what’s determined to be affordable for you, but all disposable income has to go toward your debts during the repayment period.

If you fail to follow your plan or to meet other financial obligations, like filing taxes or paying child support, you could once again be in jeopardy of losing your assets. But if you complete your plan as agreed, your remaining debt can be discharged at the end of the repayment term.

Impact on your credit

Some of the consequences of filing Chapter 13 are identical to Chapter 7. Your credit scores will take a huge hit in a Chapter 13 bankruptcy. But with Chapter 13, the hit to your credit isn’t quite as long-lasting as Chapter 7 — it stays on your credit reports for only seven years, instead of 10.

Does medical debt affect credit differently than other debt?

Yes and no. Unpaid medical bills can’t be added to your credit reports until they’re 180 days overdue. That extended grace period gives your health insurance provider time to pay your claim or for you to resolve billing disputes.

But just like any other debt, unpaid medical debt stays on credit reports for up to seven years. The only difference is that some credit-scoring models penalize you less for medical debt than for other unpaid bills.

Impact on your healthcare services

Filing Chapter 13 may help you maintain a better relationship with your medical provider than Chapter 7. While you may not ultimately repay all of what you owe, you will make monthly payments toward your debt. As a result, your healthcare provider may end up collecting more of what you owe.

Other options

Filing for bankruptcy for relief from medical debt is not without its consequences. There may be better options to help you preserve your credit and get back on track with your debt payments. 

Negotiate with the hospital

If you’re unable to cover a medical bill, try calling your hospital or doctor’s office right away. Working with providers directly could open up new possibilities, like an interest-free repayment plan, for example. That’s a better option than many alternatives, like charging the bill to a credit card that accrues interest.

Unlike some other kinds of creditors, hospitals may be willing to negotiate the amount you owe, particularly if you’re uninsured. Your hospital may also offer financial assistance, which is sometimes called “charity care.”

Credit counseling

A credit counselor can help you get your finances on track by working with you to set up a budget, or helping you get on a debt management plan with your creditors. Note that this isn’t the same thing as debt settlement, which isn’t free and can create additional problems for someone who is already struggling. Many credit-counseling agencies are nonprofit and offer their services at no cost.

In order to file for bankruptcy, you’ll be required to complete counseling with an approved credit counseling agency. But it could also be helpful to have a professional help you explore your options before then. You can find an approved agency through the U.S. Trustee Program website.

Bottom line

While there’s no such thing as a bankruptcy that addresses only your medical debts, there are multiple forms of bankruptcy that include relief for healthcare expenses.

Whether you should file Chapter 7 or Chapter 13 is dependent on the type of debt you have and whether you want to keep your assets. If you’re considering either of these options for your medical debts, talk to a bankruptcy attorney or credit counselor for advice about the best ways to handle your situation. They’ll be able to assess your debt profile and offer advice that may help you decide whether bankruptcy is worth the accompanying risks.

About the author: Sarah C. Brady is a San Francisco–based financial consultant, workshop facilitator and writer. In addition to writing for Credit Karma, Sarah writes for Experian, LendingTree, Magnify Money, MSN News and more. In her … Read more.