Answers about Medical Debt that causes Bankruptcy

Although there is no such thing as medical bankruptcy, medical debt causes many people to file bankruptcy. Below is a Q&A about these issues. 

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What is Medical Bankruptcy, Legally?

The phrase medical bankruptcy is thrown around a lot, but legally there is no such thing. The designated types of bankruptcy are labeled according to their Chapters in the U.S. Bankruptcy Code. Chapter 7, the so-called “straight bankruptcy,” and Chapter 13 “adjustment of debts,” are the most common forms of personal bankruptcy. Both Chapters 7 and 13 can deal effectively with medical debts that caused the person to file for bankruptcy and other financial problems arising from medical events.

What is Medical Bankruptcy, Practically?

Medical debts cause a large percentage of bankruptcies. One study estimated that more than half—about 61%–of personal bankruptcies had one or more medical causes. (Note that this was pre-COVID; this percentage is likely significantly higher during and after the pandemic.) The list of medical causes this study cited provides a good summary of the diverse kinds of “medical bankruptcies.” Here are some of the items on this list, along with the percentage of all personal bankruptcies applicable to this medical cause:

29.0 %: Debtor said medical bills were a reason for filing bankruptcy

32.1 %: Debtor said a medical problem of self or spouse was the reason for filing bankruptcy

29.0 %: Debtor said medical problem of other family member was reason for bankruptcy

34.7%: Had medical bills of $5,000 or more, or more than 10% of annual income

5.7%: Had mortgaged family home to pay medical bills

38.2%: Debtor/spouse lost at least 2 weeks of income due to illness/complete disability

6.8%: Debtor or spouse lost at least 2 weeks of income to care for an ill family member

So, practically speaking, if you have any of these challenges you could be considered to have a medical bankruptcy.

What Happens to Medical Debts in Bankruptcy?

It’s a surprisingly common myth that bankruptcy does not write off (legally discharge) medical debts. In almost all situations, medical debts are legally categorized as “general unsecured debts.” These are the most straightforward debts that are not secured by your property. These are treated less favorably than other more “important” debts—secured and priority debts. Secured debts are legally tied to your property—such as vehicle loans and home mortgages. Priority debts are special ones that the law protects for special reasons, like income taxes and child support. As general unsecured debts, medical debts are not treated favorably in either Chapter 7 or Chapter 13.

How Does Chapter 7 Deal with Medical Debts?

Under Chapter 7 “straight bankruptcy,” general unsecured debts, including medical debts, are almost always completely discharged. All creditors, including medical ones, must stop all collection activity the minute your bankruptcy lawyer files your case. This includes all collectors of medical debts as well. The stopped collection activity includes lawsuits and garnishments.

Then usually, about three months later, the bankruptcy court enters an order discharging all general unsecured debts. This means that those debts are forever legally gone, permanently uncollectable.

Are There Any Exceptions to this Straightforward Scenario?

There are two noteworthy possible exceptions.

First, most personal Chapter 7 cases are “no asset” ones: everything the debtor owns is protected as “exempt” property. However, sometimes an asset is not exempt, and so must be surrendered to the bankruptcy trustee. The trustee then sells the asset (or assets) and pays the creditors. The sale proceeds first go to your priority debts, such as taxes, and then to the general unsecured debts if there are proceeds left over. If there is enough left over for the general unsecured debts, the trustees pay them at a pro-rata share, which means that the proceeds are divided up based on the amount of each debt held by a general unsecured debt holder. This is true even if your medical debts are the cause for your filing bankruptcy. Usually, the amount that general unsecured debts receive, which includes your medical debt, is only a small portion of their total amounts.

Second, although virtually all medical debts are dischargeable, all creditors technically have the right to object to the discharge of their debt. This almost never happens with medical bills—it’s almost not worth mentioning here. The objection would need to be based on allegations of fraud or misrepresentation by you against the medical provider. If you have any concerns about this, talk with your bankruptcy lawyer.

How Does Chapter 13 Deal with Medical Debts?

Chapter 13 is quite different from Chapter 7, involving a three to five-year payment plan. They are usually filed when a person is behind on their secured debt payments (vehicle loans, home mortgages), priority debt payments (income taxes, child/spousal support), or has property that exceeds the exemption limits that are allowed by state law. The payment plan can be based on a multiple number of factors that your Whitefish bankruptcy attorney will be able to explain. The plan designates which debts get paid how much and when.

Because most people do not have non-exempt property or do not make income beyond the median household income for your state, the general unsecured creditor typically receives through the Chapter 13 Plan a fractional amount that it is owed. For example, a plan must pay all priority debts in full before anything goes to the general unsecured debts. If you’re catching up on a vehicle loan or home mortgage, you pay these in full before paying the general unsecured debts anything. This means that sometimes the general unsecured debts, including the medical ones, receive nothing. Often they receive only pennies on the dollar.

After the payment plan is completed, any unpaid medical debts, along with all other general unsecured debts, get permanently discharged.

Will My Medical Provider Stop Serving Me If I File Bankruptcy on Its Medical Debts?

Not likely. Any creditor, medical or otherwise, can choose to not serve you during or after a bankruptcy case. This is true whether you are asking for services on credit or not. But practically speaking most medical providers don’t end their relationship with you because you avail yourself of the legal tool of bankruptcy.

But policies about this do vary, regionally and between various kinds of medical providers. So if you are concerned about a particular provider you may want to call them and just directly ask.

Can I Favor My Medical Provider in Bankruptcy?

People sometimes have special feelings for their medical provider, such as their personal doctor or an important specialist. They may fear disrupting that relationship by filing bankruptcy which discharges that provider’s debt. So can and should you favor that provider by paying its debt more than or instead of other debts?

The simple general answer is no. One of the overarching rules in bankruptcy is that debts that are legally the same must be treated the same. That’s certainly true during the bankruptcy proceeding. In both Chapter 7 and Chapter 13 cases medical debts are treated like any other general unsecured debt. So, in the example of a Chapter 13 plan, you can’t earmark extra money to a general unsecured medical debt.

How about Paying a Medical Provider Before or After Bankruptcy?

It’s risky to try to favor a medical debt before filing bankruptcy. A significant payment to any creditor, while you’re not paying other creditors, can cause problems. It may be challenged as a “preference” payment under §547 of the Code. This can happen if you pay your medical creditor $600 or more within 90 days of filing bankruptcy. It is not a good idea to be paying medical providers more than other creditors before filing bankruptcy unless your bankruptcy attorney provides you confirmation that you can. 

After finishing a bankruptcy case nothing prevents you from paying a medical creditor, but it’s almost never worthwhile to do so. You are allowed to pay any creditor once the case is over. But there is almost never any practical benefit. The creditor can’t require you to pay a discharged debt, or condition continued services on you doing so. There would be no benefit to your credit record. The only reason to do this is for moral reasons, to fulfill some sense of obligation. This is true whether this would be to a doctor, a friend, or to anybody else. Almost always at that point you should instead just move on and focus on rebuilding your financial life going forward.