What You Need to Know Before Filing for Medical Bankruptcy

Healthcare spending accounted for 17.7 percent of the US’s GDP in 2018, in comparison to just 5 percent in 1960. In individual terms, that is an average of $11,000 per person, for a total of $3.6 trillion. Americans pay significantly more for their healthcare than the citizens of most other developed countries, and rising healthcare costs are not expected to shrink anytime soon, especially in the aftermath of COVID-19.

An aging population, administrative waste, the rising cost of increasingly innovative and increasingly expensive medical procedures, drug costs, as well as hospital monopolies all contribute to this immense expenditure. Amid all this is the American consumer, too often saddled with an enormous medical debt. And when that debt becomes far too great to pay back, the only recourse may be filing for bankruptcy.

What Is Medical Bankruptcy?

Medical bankruptcy does not exist in legal terms. When a person files for bankruptcy, they do so because they have substantial debts that cannot be repaid. There are consequences to filing for bankruptcy that make it a last resort for most – but whether those debts are owed to various individuals, companies, and/or hospitals does not matter.

What does matter is how much is owed, what the debtor still owns, and how much money they can make within a given period, among a few other factors. These relevant factors are used to determine the suitability of any given type of bankruptcy, as well as try to find a way to ameliorate the debt. Colloquially, a medical bankruptcy is a case of bankruptcy wherein the primary contributing factor was healthcare related:

      • Cost of medicine or surgery
      • Lost wages due to injury or illness
      • Or a loved one’s healthcare costs

How Many People Struggle With Medical Bankruptcy?

Truth be told, we do not know. The US healthcare system is rightly criticized for its crippling costs and the issue of widespread medical debt, and it is true that healthcare costs have risen significantly whereas wages have stagnated or only grown slowly. We also know that medical bills contribute significantly to personal debt and are currently the main cause for calls from collection agencies. The impact of insufficient health insurance and/or astronomical healthcare costs cannot be understated.

A high-profile study attempting to determine the impact of healthcare costs on bankruptcy after the introduction of the ACA attributes medical expenses as the main factor behind roughly 66 percent of personal bankruptcies. This study utilized a questionnaire built to resemble the one used in a previous study (published in 2005), which deemed that illness and injury contributed heavily to a bankruptcy if a survey respondent claimed that they had experienced health-related financial stress prior to going bankrupt.

However, there is no clear way to know how many Americans specifically file for bankruptcy because of medical debt. Debt is debt, and all debts present a burden to Americans struggling to pay. Studies that aim to determine whether those who filed for bankruptcy incurred any form of medical debt (regardless of what other debts they may have incurred) do not necessarily address how other factors contributed to their bankruptcy.

About 137 million Americans have been struggling with medical debt in the past year, while less than 1 percent of Americans have filed for personal bankruptcy (773,361 cases in 2018-2019). Studies that have attempted to find out exactly how many bankruptcies were a direct cause of healthcare costs have come to mixed conclusions. A study in the Maine Law Review estimate that medical debt played a primary factor in roughly 18 to 26 percent of all consumer bankruptcies.

A later study published in the New England Journal of Medicine estimated that only 4 percent of consumer bankruptcies were directly linked to hospitalization occurring within the last four years. Other common factors include:

      • Job loss
      • Changes in the industry
      • Marital disruption
      • Birth of a child
      • Loss of a loved one
      • Credit misuse
      • Lawsuit and legal costs

This is an important part of why a “medical bankruptcy” is largely a misnomer. Americans struggling with hospital bills and the costs accrued by injury or illness may also be struggling with any number of other financial woes. These may be related in complex ways, making it difficult to determine a primary factor.

The process for filing for bankruptcy does not depend on whether the lion’s share of your debt is owed to a hospital or a credit card company. A bankruptcy case is a bankruptcy case, and bankruptcy becomes an option whenever any form of debt becomes unpayable, and the debtor sees no other way out.

How to File for Bankruptcy

Bankruptcy is a last resort option. When a person or business declares bankruptcy, they appear before a judge. The judge and an appointed court trustee determine whether you can repay the debt in any way. The court examines your financial history, your liabilities, and your assets. They examine your income and who you live with. In a chapter 7 bankruptcy, all non-exempt assets are liquidated before your debt is discharged.

Exemptions largely vary from state to state, but usually include anything you desperately need to hold onto your job, as well as a place to stay. If, however, you do not have enough to cover the debt but may be able to earn a substantial portion over time, you may be encouraged to file a chapter 13 bankruptcy instead. In this case, the court oversees your repayment of a portion of the debt (determined during the proceedings) over three to five years, in the form of monthly installments.

Bankruptcies usually only “fail” if a court finds that the debtor has the means to repay their debts without going bankrupt. While bankruptcies do wipe out debts, they do so at a great cost – chapter 7 bankruptcies often leave individuals with the bare minimum to survive, while chapter 13 bankruptcies may completely eat into an individual’s disposable income for years. After a bankruptcy case has concluded, the individual’s credit score will remain affected for about seven to 10 years.

Either type of bankruptcy may save you from crippling debt but choosing the right one is not a straightforward process. Before settling your debts and creating a petition for bankruptcy, consider consulting with a legal professional. Going over your financial details in-depth is an important part of the process, and your individual circumstances determine the best approach.

What About the Doctor-Patient Relationship?

Most doctors and hospitals understand the need for some of their patients to file for bankruptcy to overcome their medical debts. Depending on the nature of your doctor-patient relationship, you may be able to keep your doctor as a healthcare provider if they trust you to repay your debts in the future.

However, should you be “blacklisted” by a clinic or hospital after filing for bankruptcy, your only true option may be to find an alternative provider. Unless it is a medical emergency, a doctor can refuse a patient and refer them to another physician or clinic.

Final Considerations

Medical expenses can be immense, and the burden they levy on an individual or a family can compound over years with additional treatments, medication costs, loss of work, and stress-related problems. For thousands of Americans, a diagnosis or emergency treatment became the root of a lengthy financial struggle that necessitated a bankruptcy.

For thousands of others, medical debt became the straw that broke the camel’s back. Regardless of how much of an impact your medical debt has had on your decision to file for bankruptcy, it is often the only option left to many Americans. And while you may have a long road ahead, the decision to file for bankruptcy is often a big step towards financial recovery.


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