Medical treatment gets people well. Medical bills make a lot of people sick.
Healthcare costs in the U.S. are skyrocketing toward $4 trillion a year. Paying them is so difficult that nearly one-third of GoFundMe campaigns are dedicated to raising money to help pay medical debt.
“We weren’t ever set up to be a healthcare company,” GoFundMe CEO Rob Solomon told CBS.
When people run out of money and hope, they often turn to bankruptcy. You can file for what’s loosely known as “medical bankruptcy.” But considering the damage it can do to your credit, you need to first consider whether the cure is worse than the disease.
What Is Medical Bankruptcy?
As many as 62% of bankruptcies include significant medical debt, according to a study the Maine Law Review. Despite causing so much financial stress, there is no actual “medical bankruptcy.”
When you file for bankruptcy, you are required to make a list of your debts. That’s stuff like credit cards, mortgages, personal loans, utility bills – all the money you owe but cannot pay.
It’s highly unlikely medical bills would be the sole source of debt in any bankruptcy, and all creditors are supposed to be treated fairly. You can’t simply ignore the ones you don’t want to deal with.
Treating creditors fairly does not mean they are treated equally, however. If the debt you owe is unsecured, meaning you haven’t pledged property to guarantee payment, it is put into one of two categories – priority and non-priority.
Priority means those debts go to the head of the line. The government usually comes first if you owe taxes. Then comes debts like alimony and child support.
Credit cards, utility bills and medical debt are not a priority item. The bankruptcy code basically acknowledges it’s better to stiff a surgeon over a bill than your kids over child support.
If there’s little money remaining by the time medical bills get to the head of the line, it’s too bad for those creditors. They may get pennies on the dollar or nothing at all. Either way, you’d no longer owe anything.
The main question is which form of bankruptcy is best for you?
Chapter 7 Bankruptcy
With this type of filing, most of your unsecured debt is discharged, or wiped away. And the process takes only a few months.
There’s a big hitch, of course.
You can keep assets that are exempt, like your car (as long as it doesn’t have too much equity), necessary clothing and household items, and pension income.
You have to give up other property of value, like investments, expensive clothing and most jewelry. If you have a Rembrandt, it would be sold to help pay your creditors.
You also have to pass a “means test” to qualify for Chapter 7. The basic rule there is your household income, minus reasonable expenses, must be less than your state’s median income. However, if you make less than the state’s median income, you don’t have to pass the means test.
If you qualify, and most bankruptcy filers do, medical bills are among the debts you can have discharged. That includes medical bills you have charged on credit cards or have paid with a personal loan.
Chapter 13 Bankruptcy
With Chapter 13 bankruptcy, you spend three to five years basically working to pay off your debts.
All those bills are lumped together, and the trustee determines how much you can pay based on your income. That will be less than what you actually owe, but the difference is forgiven with unsecured debts. If that amount is less than what you actually owe, the difference will be discharged.
Each creditor will receive a pro-rated portion of what they are owed. That includes doctors, hospitals and whatever other medical providers.
The downside is all your disposable income will go toward paying off debts. There will be no vacations or extravagant purchases during those 3-5 years of shoestring living.
Medical providers can refuse to treat you after bankruptcy proceedings, though it’s far from certain they would. If they do, you’d at least be out of debt when you go looking for another provider.
Impact on Credit
Credit reporting agencies don’t care what kind of debt you have. If it’s discharged in bankruptcy, it’ll be like a zombie invasion on your credit report.
A healthy credit score of 700 might plummet 200 points. Lower starting scores won’t have as far to drop, and in some cases, your credit score may improve after your debt is discharged. Bankruptcy impacts credit scores for years.
Chapter 7 bankruptcies stay on your credit report for 10 years. Chapter 13s stay on for seven years.
Your accounts won’t be reported as “unpaid,” and will show a zero balance. Instead, they’ll be reported as “discharged” or “included in bankruptcy.
But don’t despair. Millions of bankruptcy filers have rebuilt their credit scores after bankruptcy and never looked back.
Consider Your Options
About 750,000 Americans filed for bankruptcy in the 12-month period that ended in July 2019. Before joining them, consult a bankruptcy attorney or credit counselor to see if there’s a better debt relief option.
You could start by asking your hospital or doctor if they have hardship plans. They might be willing to negotiate lower amounts or easier payment options.
Anything beats paying your bills with a credit card. With interest rates averaging 20.14% in 2020, that $20,000 medical bill could end up costing $20,000 more if you put it on your Visa.
Actually, one thing is worse than paying with a credit card. That would be a debt settlement plan.
In that, you stop paying your bills and a third-party company tries to negotiate a lower lump-sum payment. The risks are the negotiations can fail, you could be sued, you’d still be charged settlement fees and you could end up with more debt than you began.
A better option is a debt management program. A nonprofit credit counseling company combines all your bills and works with creditors to find you lower interest rates.
You make one monthly payment, and certified credit counselors set up a budget that can get you out of debt in 3-5 years. It also will protect your credit score much better than bankruptcy.
No doubt, the skyrocketing healthcare costs are making a lot of American sick to their wallets. Filing for bankruptcy is one way out, but it may take you a long time to recover from such harsh financial medicine.
About The Author
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
- N.A. (ND) NEA Fact Sheet. Retrieved from https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet
- Austin, D. (ND) Medical Debt as a Cause of Consumer Bankruptcy. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2515321
- Paperno, B. (2018, March 16) 7 common myths about how bankruptcy affects credit. Retrieved from https://www.marketwatch.com/story/7-common-myths-about-how-bankruptcy-affects-credit-2018-03-16
- Bluth, R. (2019, January 16) A third of GoFundMe campaigns are for medical needs. What does that say about our system? Retrieved from https://www.tampabay.com/health/a-third-of-gofundme-campaigns-are-for-medical-needs-what-that-says-about-our-system-20190117/