Filing Bankruptcy After Illness or Injury: Navigating Your Options for Debt Relief
Nobody wants to think about filing bankruptcy after illness or injury. But when medical bills start piling up, and the calls from creditors feel endless, it can feel like you’re drowning in debt. You might be surprised to learn that medical debt is one of the leading causes of bankruptcy in America. Almost two-thirds of people filing bankruptcy say that health issues, including overwhelming medical expenses and lost wages due to illness, contributed to their decision. Even if you have health insurance, a serious accident or prolonged illness can deplete your savings and max out your coverage, leaving you with insurmountable bills and a feeling of hopelessness.
But before you give in to despair, let’s explore filing bankruptcy after illness or injury. It’s important to know that bankruptcy isn’t a one-size-fits-all solution. Understanding the basics of how bankruptcy works, what types of medical debt are eligible, and which bankruptcy chapter suits your circumstances can guide you towards the path of financial recovery. Sometimes, the toughest journeys bring us to unexpected crossroads. This article is designed to light the way and show you that filing bankruptcy after illness or injury might not be the end of the road. It could just be the beginning of a new, financially healthy start.
The Unseen Epidemic: Medical Debt in America
For many Americans, an unexpected medical crisis can be a catastrophic life event, and not just because of its impact on physical or mental well-being. This is because high health care spending in the U.S., paired with limitations in health insurance coverage, has pushed medical debt to alarming levels. In 2020, Americans spent more than $12,500 per person on medical care, with healthcare costs soaring to a total of $4.1 trillion nationwide.
This financial burden disproportionately impacts American families who struggle to keep up with medical payments and eventually find themselves facing aggressive debt collection efforts.
The magnitude of the medical debt issue becomes even more evident when you consider the numbers reported by federal agencies. The U.S. Census Bureau discovered that in 2021, 19% of American households found it difficult or impossible to pay for medical care when it was needed. Meanwhile, the Consumer Financial Protection Bureau analyzed credit reports and found that medical collections were the most common reason consumers were contacted by debt collectors. The numbers make a powerful statement: the U.S. healthcare system is putting American families in deep financial peril.
Is Filing Bankruptcy Because of Medical Bills the Answer?
Overwhelmed with the burden of unpaid bills, many financially strained Americans see filing bankruptcy for medical debt as a beacon of hope. Statistics suggest this is becoming increasingly commonplace, with the number of health-related bankruptcy filings skyrocketing over the last four decades. A groundbreaking study conducted by Harvard Medical School in 2005 discovered that health-related bankruptcies rose an astonishing 23-fold between 1980 and 2001. Sadly, the passage of the Affordable Care Act hasn’t significantly changed this dire financial landscape.
Fast forward to 2019, and researchers uncovered that despite the expansion of health insurance coverage, two out of every three bankruptcy cases were linked to medical issues. That means an estimated 530,000 American families seek refuge in bankruptcy courts each year. While filing bankruptcy might not be ideal for everyone facing medical debt, it does beg the question: Does this sharp increase in medical bankruptcy point to a desperate attempt to seek relief from an overwhelmed system?
How Medical Debt and Bankruptcy Intersect
Before you explore whether a medical bankruptcy can fix your money problems, you need to learn some basic bankruptcy law. Debt gets broken into categories during the bankruptcy process.
These classifications make a huge difference as to what happens to the debtor (you) and the lender during and after bankruptcy, making this an essential first lesson on your road to debt relief.
Secured vs. Unsecured Medical Debts
Medical debt, like many other kinds of debt, can either be secured or unsecured. You need to know the difference.
Secured medical debt arises when you pledge an asset as collateral for repayment. You most commonly use a home equity loan for this, securing the loan with your home. If you fail to keep up with the payments, the medical provider could start foreclosure proceedings.
Unsecured medical debt has no collateral backing the debt. That means if you fail to pay unsecured medical debt, the provider must file a lawsuit and eventually get a money judgment against you to collect.
Priority vs. Nonpriority Medical Debts
During the bankruptcy process, lenders and the debt owed get organized by priority. This is one of the least talked about issues in bankruptcy. But for people considering filing for bankruptcy because of medical debt, this topic is vital to understand.
Priority debts generally are government debts. Some common examples include recently assessed tax debts, student loans, alimony and child support. Because they get prioritized over most other debts in bankruptcy, the trustee or court typically require that these priority debts be paid in full during the repayment period. However, bankruptcy rules give nonpriority secured debts a lot more leniency.
Nonpriority debts commonly include obligations arising from consumer debt like credit card debt and retail accounts, along with unpaid utility and medical bills. When medical bills are classified as unsecured nonpriority debts they have the greatest chance of being completely discharged without the debtor having to pay a single cent toward them. Nonpriority debts take the biggest hit during a bankruptcy because, after secured creditors are paid, the nonpriority lenders are left dividing up what remains from your liquidated assets.
What About Chapter 7 Bankruptcy?
With Chapter 7, many financially stressed consumers can get rid of debt after illness or injury by filing for protection from creditors under Chapter 7 of the Bankruptcy Code. A bankruptcy trustee gets appointed by the court and has complete control over your “nonexempt assets”. You will work with the trustee to provide financial information including what assets you have. This information is then used to determine what, if anything, can be used to repay creditors. Your home is sometimes at risk. This type of bankruptcy works well for debtors with low income and minimal valuable property, giving them an escape route when oppressive medical bills make it impossible to meet basic financial needs. The bad news for medical providers with an unsecured claim in Chapter 7 is that they often receive nothing.
To illustrate this, imagine a cashier who needed back surgery after being involved in a car accident. The medical provider is charging $8,000 for this treatment, but it isn’t covered by her medical insurance. Because the cashier only owns an older vehicle, her furnishings and very limited funds in her bank account, there wouldn’t be any nonexempt property that would need to be liquidated. So Chapter 7 would help get rid of this debt without requiring repayment or taking assets away. That would give the cashier a chance for a clean financial slate, even though the medical provider receives no payment.
Although it offers many benefits for those struggling with overwhelming medical debt, this approach also has certain limitations that make it unsuitable for all cases. The biggest disadvantage of filing Chapter 7 for many is that your income must fall under the threshold established by the bankruptcy court, which changes depending on your state and the number of people in your household. High-income earners, or debtors with assets exceeding their state’s property exemptions, will be better suited to file Chapter 13. But even this bankruptcy chapter has its shortcomings and complexities.
What About Chapter 13 Bankruptcy?
Often called a Wage Earner’s Bankruptcy, filing Chapter 13 enables the debtor to get back on their feet. Under Chapter 13 you enter into an extended payment plan over a 3- to 5-year period, gradually repaying a court-approved amount towards qualifying debts. It can also help debtors catch up on payments for vehicles or homes, rescuing them from the risk of repossession or foreclosure, which isn’t allowed with Chapter 7. When used for medical debt, this process enables borrowers to settle healthcare costs in installments they can better afford.
While you have a Chapter 13 repayment plan active, the court prohibits the lender from starting a lawsuit or taking steps to collect on the debt. The longer repayment terms often significantly lower monthly payments on outstanding bills, offering a lifeline for people experiencing financial difficulty due to job loss or limited earnings following a serious injury or illness. But Chapter 13 comes with caveats, particularly when substantial debt is involved.
To illustrate this, consider an example. A high-income CEO earns too much money to be eligible for Chapter 7 Bankruptcy and wants to pay down a $50,000 debt arising from denied health insurance coverage. She meets with a bankruptcy lawyer after receiving a summons and complaint for an unpaid hospital bill. During their meeting, she learns about Chapter 13 as a debt-relief option, as well as some benefits it has over Chapter 7. Chapter 13, unlike Chapter 7, will help prevent the healthcare provider from getting a judgment while the plan is active, giving her a path to settle the bill.
The bankruptcy filing provides several immediate advantages, though she’ll have to dedicate funds from her monthly disposable income for several years.
Beyond Bankruptcy: Exploring Other Debt Relief Options
Although the bankruptcy code offers much needed support for those confronting medical debt, it’s crucial to explore all debt relief possibilities before entering bankruptcy court. Because the bankruptcy process comes with significant disadvantages, carefully researching other ways to manage medical debt, understand your current options, and identify the optimal path to get back to financial stability can have a profound impact on your ability to regain financial peace and reclaim your financial independence.
When a Medical Bankruptcy Isn’t the Best Fit
Suppose medical debt is your only source of financial difficulty. In that case, exploring debt-relief options that have a minimal effect on credit, while helping rebuild your financial footing, can protect credit history, improve credit scores, and give you time to establish a healthy spending and saving strategy.
Why a Clean Credit Profile Matters
Bankruptcy filings significantly affect your credit history and can lower your credit scores, and often result in higher fees and interest rate charges for car loans and credit cards. Bankruptcy will also likely cause difficulty when renting an apartment. This financial ripple effect lasts a long time.
While the harmful consequences are greatest for those filing Chapter 7 Bankruptcy, as it stays on credit reports for a 10-year period, Chapter 13 doesn’t completely resolve this dilemma. That is because Chapter 13 Bankruptcy remains for a 7-year period, during which many opportunities become unattainable due to lowered credit.
For most filers, it can be the first obstacle on the long road to credit restoration, though thankfully, not always insurmountable.
Thankfully, many credit reporting models give less weight to unpaid medical debt than to missed payments on loans, mortgages or credit card bills. Moreover, recent updates regarding how the major credit reporting agencies treat unpaid healthcare debt have created a positive development for Americans battling this dilemma, making it possible for borrowers to avoid the more severe impact a bankruptcy brings.
Resolving the Issue of Unpaid Medical Bills
Under the new rules for credit reporting, lenders must give you a one year period before reporting this debt. After this waiting period is over, any medical debts in collections for less than $500 don’t appear on credit reports, further assisting those fighting against overwhelming healthcare costs. Moreover, paid-off collections, including collections that were satisfied through a settlement, no longer show on reports, further reducing its adverse effects.
Here are additional steps you might consider:
- Negotiating With Healthcare Providers. Consider reaching out to hospitals, physicians, or ambulance services and make them an offer for a percentage of what you owed on the bill, even offering a lower lump-sum. Medical providers frequently are eager to settle.
They will likely take the “bird in the hand” now rather than take an expensive and unpredictable trip through the debt collection process or chase debtors through bankruptcy court.
If the bill was for uninsured medical expenses, it could also result in larger concessions because this debt is even less attractive. For many lenders, discounting uninsured bills for those who have limited financial means can also serve their goodwill efforts.
They will consider this goodwill in exchange for lowering an unpaid debt that is difficult to recover. - Entering Into a Debt Management Plan. An alternative approach for struggling debtors, this option enlists the expertise of credit counselors, whose knowledge of debt-relief tools and negotiating techniques with creditors can create repayment plans that offer lower monthly payments, more favorable repayment terms, and often forgiveness of fees. If medical debt, including bills that have already been sent to collection agencies, has turned into a roadblock in your financial recovery, then debt management might provide you with a solution.
- Seeking Out Medical Assistance. Contacting a financial aid counselor with a hospital is the first place you should start if facing exorbitant bills from an extensive hospital stay or complicated procedure.
Not only are hospital staff frequently compassionate about those with a demonstrated financial hardship, but most large hospitals, along with teaching or non-profit hospitals with a tax exempt status, provide assistance with payment through various program offerings. Because medical assistance requirements vary from institution to institution, inquire directly. They’ll gladly explain requirements to qualify for help with bills. Some organizations or non-profit hospitals offer substantial help. The federal government requires many not-for-profit hospitals with tax exempt status to prove that they provide services for indigent patients. - Selling Valuable Possessions. Do you own possessions that are valuable, like jewelry or collectible toys, a boat, RV, timeshare, motorcycle, or ATV, or perhaps a vacation home or rental property? Consider selling the asset.
You could redirect funds towards creditors. If an asset or possession has substantial value, selling the asset might give you funds to repay medical creditors and avoid the less favorable results a bankruptcy might cause. While some will call this strategy a last ditch effort to avoid bankruptcy court, many see it as a proactive and smart tactic that minimizes overall losses and avoids jeopardizing the ability to get loans, mortgages, or credit cards in the future.
This financial maneuver offers the advantage of greater personal control over repayment, without requiring strict bankruptcy deadlines. Some see it as an effective compromise to debt-relief strategies that aren’t suitable or don’t work.
Navigating Your Way Through a Medical Bankruptcy
Navigating your way through a medical bankruptcy can feel scary, though you are certainly not alone if considering filing for protection. An experienced bankruptcy lawyer can provide you with crucial guidance and advocate on your behalf in bankruptcy court.
Recognizing the Financial Signals for When It’s Time to File Bankruptcy
Knowing when it’s time to file medical bankruptcy isn’t easy and requires more than the realization that debts have spiraled out of control. You have to understand debt collection strategies and prioritize finding solutions that work. But there’s no substitute for honesty if bills are piling up faster than you can make payments.
Medical providers will happily take you to court if you fail to pay them what they are owed, no matter how compassionate their advertisements claim they might be about your hardship. Because many debtors feel guilt or shame about unpaid medical bills, lenders take advantage of these vulnerabilities during collections, encouraging promises that borrowers have no intention of keeping.
Protecting What’s Yours
Although it starts with demanding letters, eventually lenders escalate collection efforts. They’ll make phone calls, and hire agencies or in-house departments.
Debt collectors aren’t bound by doctor-patient privacy rules, allowing them to share your sensitive financial problems with family, neighbors, or even bosses. This creates pressure to make immediate payments and causes added stress or anxiety about what happens next. Sadly, debt collectors exploit these vulnerabilities, coercing empty financial promises. They secure repayment plans with terms they know are impossible, ensuring a faster move to more severe measures.
When these tactics don’t generate results, collection agencies file lawsuits and pursue a legal judgment that has profound financial ramifications for the debtor. This money judgment isn’t limited to seizing money you have in bank accounts or garnishing wages. Money judgments permit the lender to place a lien against assets such as your house, or anything of value you own. Because creditors are notorious for patiently waiting, sometimes decades, filing bankruptcy before a money judgment happens offers debtors one of the most effective avenues for preventing additional losses or financial turmoil.
Seeking a Safe Passage Through a Medical Bankruptcy
While Chapter 7 Bankruptcy gives qualified borrowers relief by erasing medical bills within 4 to 6 months, as a “discharge” means that those debts will no longer need to be paid, Chapter 13 functions differently. For borrowers with sufficient earnings and “disposable income” they use the bankruptcy courts to their own advantage. The 3 to 5 year structured repayment plan with Chapter 13 protects them against judgment while creating installments that are reasonable and manageable.
But this bankruptcy solution isn’t limited to these benefits. It can be the tool you need to turn the tide against creditors if your income exceeds what is allowed in Chapter 7. As a Chapter 13 debtor, you force the provider to take lower monthly installments to settle what was originally demanded, or even reduce the overall obligation as a condition for completing your repayment.
Chapter 13 allows high income borrowers, even wealthy ones, a safe passage out from overwhelming debt, using bankruptcy laws that offer far greater flexibility.
But many financially savvy Americans see bankruptcy not as an emergency debt-relief option, but a strategic tool they control to rebuild after financial difficulty. The right attorney will educate, advise, and lead through every bankruptcy phase with a well planned approach designed to protect assets.
Conclusion
Filing bankruptcy after illness or injury might feel like a scary or even shameful proposition. But when overwhelming medical debts threaten to break you financially, understanding your debt relief options, especially Chapter 7 and Chapter 13 bankruptcy, becomes an essential lifeline in your path towards recovery. You have nothing to feel guilty about if seeking refuge through the bankruptcy code, because a staggering 66.5% of Americans who choose to file cite medical problems as the root of their problems.
But filing bankruptcy isn’t a “quick fix” or an automatic answer, as many borrowers don’t have assets that are eligible, or aren’t a good fit. It’s critical that you work with an attorney, prioritize taking an informed, methodical approach and explore various debt-relief strategies, including negotiation with providers, before making this difficult choice. To schedule a free consultation, contact The Law Office of William Waldner today.