Bankruptcy and Medical Debt: What You Need to Know


Struggling to pay health care bills is not just a major problem for millions of people across the country: it is an overwhelming burden, and a full-blown financial epidemic. In fact, a study by the Centers for Disease Control and Prevention (CDC) revealed that a staggering 1 in 3 adult Americans have unpaid medical bills.

If you or a loved one is facing an unsustainable — and ever-growing — mountain of medical-related debt, and creditors are starting to sharpen their proverbial claws with threats of everything from wage garnishments to civil lawsuits, then filing for bankruptcy may indeed be in your best short and long-term financial interest.

According to Charles H. Huber, an experienced bankruptcy attorney (learn more at here are the basics of bankruptcy and medical debt that you need to know now vs. later:

  • Medical Debt is Unsecured Debt

Medical debt is viewed by the court as general unsecured debt, which means that it is eligible to be wiped off the books as part of a chapter 7 liquidation filing (keep in mind though, that this pertains to debt incurred before the filing).

With this in mind, debt that is designated as secure or non-exempt will still be payable after the filing. These debts include restitution orders per a criminal conviction, spousal support, child support, and student loans (note that financial relief from student loan debt is possible, but must be petitioned for as part of separate filing).

  • You Need to Qualify for Chapter 7 Bankruptcy

To qualify for chapter 7 bankruptcy, you must pass the means test in your respective state. This formula determines whether your average monthly disposal income (salary and other income minus eligible expenses) is below a certain threshold. If not, then you may be eligible to for chapter 13 bankruptcy, which is a structured payment plan that typically takes 3-5 years. Based on current levels, you can file for chapter 13 bankruptcy if your total unsecured debt (including medical bills) doesn’t exceed $394,725, and your secured debt (such as mortgage and car loan) doesn’t exceed $1,184,200.

  • Be Very Careful About Cashing in Your Retirement Portfolio

Some creditors may tell you that you must cash in your retirement portfolio in order to pay down your medical bill. This is simply not true. If you file for bankruptcy, then any funds in a legitimate retirement vehicle (such as a 401(k)) will not be liquidated as part of the proceedings.

The Bottom Line

Facing a mountain of medical debt is scary, and the prospect of filing for bankruptcy can be even more terrifying. However, the most important thing to keep in mind — and the fact that creditors typically don’t want you to know — is that bankruptcy is not a moral judgement. It is a legal protection designed to enable people (as well as businesses) get out from under an unsustainable debt spiral.

As such, and as difficult as it may be at this time, try to dial down your emotions (I know — this is easier said than done!), and instead educate yourself with facts, so that you can make a smart and safe decision that is right for you, and best for your short and long-term future.



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