Borrowing to pay medical debts creates new potential risks. A debt that was easy to discharge in bankruptcy becomes one that you often can’t. 

About one-fourth (26%) of American adults (18-64 years old) reported that they or someone in their household had problems paying medical bills during the previous year. This is according to a 2016 survey by the highly reputable Kaiser Family Foundation, The Burden of Medical Debt. Not surprisingly, more than half of people who did not have health insurance reported such problems. However, more than one-fifth of people who had health insurance still had trouble paying medical bills. So if your medical bills are a challenge for you, you are clearly not alone.

You may have options short of borrowing money to pay off the medical debts. It’s worth contacting the medical creditor—as early as possible—to find out their payment alternatives. Sometimes interest-free repayment plans are available. In some situations, medical providers are willing to negotiate a settlement with you reducing the balance. Especially if you are uninsured, you might even qualify for financial assistance.

Even though legally, there’s no such thing as a medical bankruptcy, many bankruptcies are caused by medical problems. Here’s a Q&A about these.  

In the last two weeks, we’ve written about health insurance. Two weeks ago, we discussed the six months of free health insurance provided by the recent American Rescue Plan Act.  Last week we got into the broader topic of health insurance and bankruptcy. Today we broaden it out even more with a Q&A about medical bankruptcy. 

What is Medical Bankruptcy, Legally?

Although the phrase is thrown around a lot, legally, there is no such thing. The legally 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 Chapter 7 and 13 can deal effectively with medical debts and other financial problems arising from medical events. 

The U.S. has some of the highest medical costs in the world, leaving many patients who visit the emergency room or go to the hospital financially destitute. Even those who have health insurance may find that their coverage is not enough to fully cover their necessary medical treatments. No one can predict the manifestation of serious illnesses or accidental injuries, but you rarely have a valid choice, leaving you to choose between unwanted debt or suffer the possibly fatal consequences. If you find yourself overwhelmed with medical debt, you do have legal options to help you payback the costs overtime or relieve yourself of the costs altogether. Filing for bankruptcy may be your last resort, but it may also be your only chance of moving forward.

“Medical Bankruptcy”

Those whose debt is solely made up of pastdue medical bills may believe that they can file for “medical bankruptcy” and avoid their other assets getting involved in the process. There is no type of bankruptcy known as medical bankruptcy; however, medical bills are a common reason that people file for bankruptcy. Medical debt falls under the same category, known as unsecured debt, as credit card debt, personal loans, old utility bills, and borrowed money from family or friends. Since bankruptcy cases must be equally fair for both the debtor and creditor, you must list all of your debts, personal property, and real estate within your bankruptcy case. There are two ways that most people file for bankruptcy: Chapter 7 and Chapter 13 bankruptcy, both of which have a large impact on your credit score.

Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy is often the more desired option since it discharges or forgives all of your debts, not requiring you to pay them back. Any medical debt that you have accumulated can be included in a Chapter 7 bankruptcy claim. The process typically only takes four to six months to complete and grants immediate relief to those filing for this type of bankruptcy. There are a few types of debt that cannot be discharged, such as income taxes and past-due child support or alimony payments. While Chapter 7 is often the most desirable option, since you will not need to pay the debt back, there are strict eligibility requirements. If your household income is lower than the state median income, you are eligible to file Chapter 7 bankruptcy.

Most of the time, a person files for bankruptcy because it is the last option for bills that cannot be paid. After all, a bankruptcy on your record can diminish your credit score and make it difficult to borrow money for items like a house or a car for years. When a person files for bankruptcy, it is because they have exhausted all other options. Unfortunately for many Americans, the thing driving them to file for bankruptcy is medical debt. According to CNBC, 66.5 of all bankruptcies filed in the United States between 2013 and 2016 were tied to medical issues such as high costs for medical care or taking time off of work for medical reasons. If you have found yourself in the precarious situation of too much medical debt, here are a few things you should know before you file for bankruptcy:

Your Medical Debt is Dischargeable in Bankruptcies

Here is the good news -- medical debt is dischargeable in both Chapter 7 and Chapter 13 bankruptcies. The type of bankruptcy you file for will entirely depend on your financial situation and which option would make more sense. A Chapter 7 bankruptcy would completely eliminate your medical debt, while a Chapter 13 bankruptcy would reorganize your debt into manageable payments.

Even though the enrollment deadline for healthcare under the Affordable Care Act just passed, it is clear that medical bills are still a big problem for many Americans. According to NerdWallet, one in every five Americans will have difficulty paying medical bills this year. Medical bills are actually the leading cause of personal bankruptcy filings, once individuals and families have used savings, credit cards, or attempted to refinance their homes.

While around 20 percent of people are struggling with medical bills in one form of another, three out of every five bankruptcies is due to medical bills. In fact, nearly 10 million Americans with year-round healthcare will still be unable to pay their medical bills. Many families look for ways to cut costs, including skipping vital prescription medications. Others will turn to loans, credit cards, or other financing methods. Some of those families, however, will find themselves facing bankruptcy.

One catastrophic medical event can set an individual or family back. An unexpected diagnosis or major accident can lead to many months or years of treatment, racking up bills. Those who are covered by health insurance may overestimate the extent to which their policy will help them, and some may find out too late that they are buried in bills that they can never hope to pay. And even when a good faith effort is made to pay down a selection of bills, it may still be impossible to catch up.