Filing for Medical Bankruptcy when you should Avoid it

Medical Bankruptcy is a term used to describe a person declaring him or herself as bankrupt due to their inability to repay the mounting medical bills or other debts related to obtaining treatment for medical illnesses. Such individuals can file a bankruptcy case under ‘chapter 7’ or ‘chapter 13’ bankruptcy and expect to obtain relief in clearing off the debt or arrive at a realistic repayment plan. However, it is not always the best option to take as filing for bankruptcy will have many negative influences on a person’s financial reputation.

What are the indications for filing a medical bankruptcy?

According to a study conducted by the Harvard Medical School, among the bankruptcy cases filed in the year 2007, almost 60% were medical bankruptcy claims. This is rather alarming when considering the fact that, many of those who filed for bankruptcy did have medical insurance as well.

However, when illnesses become severe, sustained, and debilitating, it may far exceed the amounts covered by medical insurance and it may require the person to seek other avenues of funds such as credit cards. When these medical bills accumulate and the ability to pay for such debts does not exist, one may opt for declaring medical bankruptcy in view of obtaining relief. Usually, such action will be filed when there is a risk of losing the persons primary residence, whatever savings left for further medical care or daily living is at risk of being used for paying accumulated medical bills, when the livelihood is lost and when the income generating capacity is lost due to some reason.

What are the instances where filing bankruptcy may not be suitable?

One instance where claiming bankruptcy is not advisable is when a previous bankruptcy petition was rejected within the last 180 days and one has obtained relief thorough bankruptcy within the past 6 years. At the same time, when most of the accumulated debt is within the last few months or when there is lying involved in relation to obtaining such debts, applying for bankruptcy may not be a good idea.

In certain instances, if a person ran up debt knowing that there would not be any means of settling such debts, it may weaken the claim for bankruptcy although it may not be as important in the case of medical bankruptcy as in the case of other types of bankruptcy.

Another instances where petitioning for bankruptcy would not be the best option to take is when there is another party co-signed for any of the debt documents in which case the creditors can go after such signatories. This is the same when the person filing for medical debt partners a company or a business corporation in which case these institutions would be at risk of litigation. At the same time, owing more than one house, expensive cars…etc would also weaken a petition for medical bankruptcy.

What are the alternatives for medical bankruptcy claiming?

With medical bankruptcy, credit card companies and other institutions named as creditors would risk of zero recovery and therefore in most instances, they would be open for discussion with their clients to plan a settlement structure. Such a settlement structure with realistic goals would pave way for avoiding litigation and the necessity to claim bankruptcy. However, one should remember that, going for such repayment agreements might not be suitable if an adequate income cannot be guaranteed throughout the agreed repayment period.


Managing Medical Bills on the Brink of Bankruptcy, Melissa B. Jacoby & Mirya Holman, This Article is forthcoming in the Summer issue of the Yale Journal of Health Policy, Law, and, Ethics, and may be cited as 10 YALE J. HEALTH POL‘Y L. & ETHICS 239 (2010).