What are medical bankruptcies?

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• Medical bankruptcy is an unofficial term for bankruptcy filed due to overwhelming medical bills.
• Most people file for Chapter 7 bankruptcy to discharge medical debt.
• With options such as debt settlements or payment plans, bankruptcy should be a last resort for medical debts.

With roughly 41% of Americans in some form of medical debt, declaring medical bankruptcy is not a shameful or wrong decision. It can help you get out of a debilitating situation. With that said, there are some critical points to know before you declare bankruptcy or even prior to taking out medical loans. 

What is medical bankruptcy?

Medical bankruptcy is an unofficial term for bankruptcy that results from debt accrued through medical expenses. A person may need to declare bankruptcy due to unpayable medical bills stemming from a one-time unexpected medical or dental bill, chronic illness, or a tragic health occurrence, such as a heart attack, says Michael Botta, PhD, cofounder and president of Sesame and a health reform legislation and implementation advisor.

Medical bankruptcy can remove the pressure of immediately needing to pay unmanageable bills. "Filing for bankruptcy for medical debt means the debt will be alleviated, or you will set up a realistic payment plan," says Botta. "Medical debt is a form of unsecured debt, like credit card debt, that is not tied to any property or assets."

As an unofficial term, medical bankruptcy isn't explicitly included in the United States Bankruptcy Code. Instead, most people file for Chapter 7 bankruptcy to erase their medical debts. "When listing this debt, make sure you cast a wide net: list every doctor, hospital, clinic, or group that you have visited to make sure everyone gets notified and stops attempting to collect from you," says Amy Wilburn, a bankruptcy attorney with Lincoln-Goldfinch Law. 

It's also important to note that when you file for Chapter 7 bankruptcy, you'll have to declare all your current debts when filing, not just your medical debts. Botta says that choosing to file for bankruptcy can negatively impact your credit score for seven to 10 years, depending on which form you declare. As a result, your ability to take out a loan will be severely inhibited.

What to do before declaring medical bankruptcy

You will likely incur medical expenses at some point, but they don't have to be financially devastating. Here are a few steps to reduce their impact or need altogether.

Check your bill

Never assume that the bill you've received from a medical provider is entirely accurate. It might include inflated costs or events that are covered by your insurance. Since the start of 2022, the No Surprises Act has limited what out-of-network services providers can charge you for, especially without your permission, the Consumer Financial Protection Bureau (CFPB) reports. It also requires that uninsured individuals receive a "good faith" estimate of how much something will cost — with the bill disputable if it goes beyond $400 more than the number given. 

Explore different payment options

Non-profit hospitals are required to offer financial assistance or a "charity care" program, the Kaiser Family Foundation reports. Wilburn recommends seeking out their business office to discuss this option. If you don't qualify for this, your provider might still offer a payment plan or a reduced cost if you pay the bill in a lump sum, explains Joanna Fawzy Morales, CEO of Triage Cancer and a cancer rights attorney.

You can also reduce medical debt through a debt settlement. However, debt settlements should not be considered lightly, as they can lower your credit score. You must carefully consider whether you want to negotiate your debt settlement on your own or use a debt settlement company, which you must vet carefully. Here's our guide on the best debt settlement services.  

"Filing for medical bankruptcy should be an option of last resort," adds Botta. "Negotiating can often reduce the total amount owed — particularly for medical debt, which is often sold by healthcare providers to debt collectors for pennies on the dollar."

Research different lenders

Your credit history will impact the loan and interest rates you qualify for, but that doesn't mean you should accept the first offer. "Research several lenders to find the best rates and loan terms," says Botta. "Most medical loans are unsecured loans, meaning you don't have to provide collateral to secure the loan. However, if you have a low credit score, the loan may need to be secured by providing collateral."

Also, take a moment to decide what decision you will make. "We have been hearing lately that hospitals are offering these loans or credit cards while patients are still in exam rooms or the emergency room, and patients feel pressured in a crisis moment to accept these offers that sound helpful until you read the fine print," says Fawzy Morales. This is a big decision and requires consideration. 

Structural issues in the US can increase the risks of medical bankruptcy

The US has no guarantees that its residents will receive affordable access to healthcare. Insurance is tied to factors such as employment, marital status, and age — and, even with it, out-of-pocket costs can be exorbitant. "For those who are self-employed, including gig workers, often insurance is unaffordable, so they go without. When they need medical care, they incur significant medical expenses," says Wilburn. At the same time, she adds, the cost of providing insurance to employees has increased while the benefits have shrunk.

Insurance companies are also in the habit of denying coverage for provider-prescribed care. According to a recent ProPublica investigation, doctors employed by insurance provider Cigna denied more than 300,000 requests over two months in 2022. They spent an average of 1.2 seconds on each case and didn't even open the person's file. In instances of care denial, Fawzy Morales recommends pursuing an external appeal, a process she credits with having a 50% success rate. 

The services themselves vary tremendously in cost from place to place. "Many patients do not know that they can — and should — shop around for their medical care," says Wilburn. "Where an X-ray may cost $250 at one location, it might cost $99 down the road. It can be time-consuming, but worth the savings to call providers and ask about their service costs."

All of this is on top of structural racism, categorized by issues such as the wealth gap and disparities in medical outcomes, explains Wilburn. The Brookings Institute reports that 27% of Black households in the US have medical debt, compared to 16.8% for the rest of the country. The services provided to Black people are often unequal and leave a greater chance of debt in their place.  

Medical debt is also more prevalent in the South, where many state governments did not expand Medicaid, including Georgia, South Carolina, Mississippi, Alabama, and Tennessee. Not only are these states more heavily affected by medical debt, a Washington Post investigation found a correlation between states with high medical debt and low average credit scores. 

Medical bankruptcy frequently asked questions

What bankruptcy is best for medical bills?

Chapter 7 bankruptcy is the most common bankruptcy filing for medical bills. This is largely because the process of filing Chapter 7 bankruptcy is quicker than the process for Chapter 13, and thus, the legal fees won't be as high.

How common is medical bankruptcy?

Medical debt is one of the leading causes of bankruptcy, cited in 66.5% of bankruptcy cases according to a 2019 study.

How does medical bankruptcy affect your credit score?

While medical debt itself won't impact your credit score too severely thanks to protections enacted by the credit industry, a bankruptcy will significantly impact your credit score, often by over 100 points.