“I want to file medical bankruptcy.”  I get that phone call a lot.  The situation is that many people are current on their house, car and credit card payments, but they were hit by a wave of medical bills and just want to file bankruptcy on those debts.  Can a person just file bankruptcy on medical debts?  Is there such a thing as medical bankruptcy?

Technically, there is no such thing in the law as medical bankruptcy, and there is no way to file bankruptcy by only listing medical debts.  When you file bankruptcy all debts are listed.  In fact, when somebody files bankruptcy they sign a sworn statement that says, under penalties of perjury, that they have listed ALL their debts.

When someone says they filed medical bankruptcy what they mean is that they filed not because of irresponsible spending but because of something beyond their ability to control–their health.  You hear the term medical bankruptcy a lot for good reason.

NerdWallet estimates for 2013:

  • 56M Americans under age 65 will have trouble paying medical bills
    – Over 35M American adults (ages 19-64) will be contacted by collections agencies for unpaid medical bills
    – Nearly 17M American adults (ages 19-64) will receive a lower credit rating on account of their high medical bills
    – Over 15M American adults (ages 19-64) will use up all their savings to pay medical bills
    – Over 11M American adults (ages 19-64) will take on credit card debt to pay off their hospital bills
    – Nearly 10M American adults (ages 19-64) will be unable to pay for basic necessities like rent, food, and heat due to their medical bills
  • Over 16M children live in households struggling with medical bills
  • Despite having year-round insurance coverage, 10M insured Americans ages 19-64 will face bills they are unable to pay
  • 1.7M Americans live in households that will declare bankruptcy due to their inability to pay their medical bills
    – Three states will account for over one-quarter of those living in medical-related bankruptcy: California (248,002), Illinois (113,524), and Florida (99,780)
  • To save costs, over 25M adults (ages 19-64) will not take their prescription drugs as indicated, including skipping doses, taking less medicine than prescribed or delaying a refill

“Medical Bankruptcy” is really Chapter 7 or Chapter 13 Bankruptcy.

When someone says they filed medical bankruptcy they really mean to say they filed Chapter 7 or Chapter 13 bankruptcy.  All debts must be listed, even the ones you want to keep, such as auto and mortgage debts.  However, this is not really a big problem you can sign Reaffirmation Agreement in Chapter 7 cases to keep and revive the debts you want to keep.  A Reaffirmation Agreement basically pulls a debt out of the bankruptcy case so that you can keep the car, home, etc, and continue the benefit of getting positive credit reporting.

Ongoing Medical Bills: The benefit of Chapter 13 cases.

I meet many clients who suffer from ongoing medical problems. Even if they file Chapter 7 today to wipe out the medical bills, in six months they are right back where the started with new medical debts.  They may lack health insurance or the insurance they have contains loopholes that don’t cover certain medical treatments.  Such individuals may benefit from the extended protection of Chapter 13.  Chapter 13 cases can be open from 3 to 5 years and may eventually be converted to Chapter 7 to add new medical bills that accrued during the bankruptcy.  While a person is in Chapter 13 creditors may not garnish paychecks or bank accounts.  In some ways, Chapter 13 is something of a drastic form of health insurance.

Image courtesy of  Flickr and Scott Kless.