Does bankruptcy clear medical debt?
Medical bills you can’t afford can negatively impact every area of your life, and you may be tempted to declare bankruptcy to eliminate the burden.
But unlike Michael Scott in The Office, you can’t just “literally declare it.”
And, even if you could, does bankruptcy clear medical debt? The short answer is yes—medical debt can potentially be forgiven through bankruptcy.
But bankruptcy comes with lasting credit damage, and you must qualify for the stringent requirements and processes involved.
This article explores:
- The role medical debt plays in bankruptcy
- Qualifying for Chapter 7 versus Chapter 13 bankruptcy
- The aftermath of bankruptcy on your credit and finances
- Alternatives to bankruptcy that could help resolve medical debts
Can you declare bankruptcy on medical debt?
You can, but bankruptcy is not specific to medical debt; medical bills can be discharged along with your other obligations.
Looking at the solutions to clear medical debt, there are two primary options: Chapter 7 and Chapter 13 bankruptcy.
Both allow medical debt to be forgiven, but the main difference lies in the type of bankruptcy you qualify for based on income, assets, and debt levels.
With Chapter 7, you can fully eliminate medical debts in as little as 4-6 months. Chapter 13 involves a 3-5 year repayment plan before discharging the remaining balances.
Qualifying for Chapter 7 bankruptcy
Chapter 7 bankruptcy completely wipes away eligible debt, including medical bills. But certain conditions must be met:
- Based on household size, your income has to fall below your state's median income level. There are also expenses and deductions that can lower countable income.
- You have to pass the Chapter 7 "means test" showing financial difficulty in repaying debts.
- The court can force the sale of your nonexempt property to repay creditors. Each state has exemption laws to protect some assets like clothing, appliances, cars up to a certain value, and a portion of your home's equity.
If your income or assets exceed state thresholds, you won’t qualify for Chapter 7 relief. If that is your situation, you’ll then have to consider repaying debts through Chapter 13 instead.
Qualifying for Chapter 13 bankruptcy
Chapter 13 bankruptcy allows debt repayment over 3-5 years before discharging remaining balances. To qualify you must:
- Have regular income to fund the proposed repayment plan. Unemployment or underemployment excludes Chapter 13.
- Keep secured debt like mortgages and auto loans below $1.2 million and unsecured debt below $400,000.
- Get court approval for your repayment plan based on IRS allowances for living expenses. Plans typically last from 36-60 months.
- Make all required monthly payments. If you fail to do so, your case could be dismissed without debt relief.
- Avoid acquiring new debt during your repayment plan or your case could be dismissed.
If you don’t qualify for Chapter 7 but need bankruptcy relief, Chapter 13 presents an option to repay debts over time before discharge.
The aftermath of bankruptcy on credit and finances
The sense of freedom and reduced stress after eliminating debts through bankruptcy comes at a steep price. Be prepared for lasting credit impact and financial constraints:
- Bankruptcy stays on your credit report for 7-10 years, depending on the chapter filed, which can damage your credit score and loan approval odds. If approved for a loan during this period, expect to pay higher interest rates.
- You may have to surrender vehicles or real estate to creditors or even face household goods seizure if a creditor obtains a court judgment against you prior to bankruptcy.
- Keeping your assets can be complicated, and you will have already sunk around $1,000-$3,500 in attorney fees. Once the wage garnishment suspension eventually lifts, collections for debts not eliminated by bankruptcy are also allowed.
- The final cost is your time, with required credit counseling and financial education.
Keep in mind that co-signers on any debts remain liable even if discharged through your bankruptcy.
Alternatives to bankruptcy for medical debt
Before considering bankruptcy, fully explore these options to resolve medical debt:
Request an itemized bill and audit carefully. Dispute any overcharges or duplication. This alone could significantly lower balances owed.
Discuss hardship assistance. Many providers offer financial assistance programs and charity care options based on your ability to pay. They may substantially reduce or even forgive balances for uninsured and underinsured patients. Ask billing departments for applications.
Set up interest-free payment plans. Rather than paying lump sums, propose monthly payment plans at no interest. Get any plan approved in writing with set terms before making payments. This prevents collection efforts as long as you pay on time.
Leverage medical credit cards. Cards like CareCredit offer no-interest financing on balances of $200 or more for 6-24 months when used for healthcare expenses. This delays payments without accumulating interest the way regular credit cards do. Pay on time and don’t max out limits.
Seek assistance from reputable credit counseling agencies. Nonprofit credit counseling provides free budget and debt help. They can negotiate reduced payments and interest rates with health providers. If payments become unaffordable, they help navigate hardship options.
Evaluate affordable health insurance options. Having health insurance coverage can prevent massive medical bills in the first place. Review plans on your state’s ACA insurance exchange. If household income is below 150% of the poverty level, you may qualify for Medicaid.
Tap hospital charity care programs. Uninsured or underinsured patients can apply for free or discounted care through hospital charity programs. Income criteria vary by hospital.
Contact community health clinics. Health clinics provide primary care on an income-based sliding scale. Fees could be as low as $20-40 per visit based on earnings. This allows establishing a medical home for continued care.
Research prescription assistance programs. Pharmaceutical companies offer programs helping uninsured patients get medications free or at greatly reduced costs. Applications are drug-specific and income-based. Your doctor or clinic can help enroll you if you’re eligible.
Consider crowd-funding medical bills. Sites like GoFundMe allow sharing your story to raise donations for healthcare costs. Some hospitals even partner with crowd-funding platforms to help patients raise funds.
Look into every debt relief option for your specific situation. It can also be worth talking to reputable credit counseling agencies and legal aid organizations.
So, does bankruptcy clear medical debt?
As explained, it does, but at a price.
Think it over carefully and evaluate your situation. Bankruptcy can quickly eliminate medical debts, but the financial wreckage can linger for years.
Treat it as an absolute last resort and pursue other debt relief strategies first.
There are lots of options out there, so don’t lose heart and stay patient.