What Does Filing for Medical Bankruptcy Mean?

“Medical bankruptcy” is a term for filing bankruptcy primarily due to overwhelming medical debt. This is not a distinct legal category under the U.S. Bankruptcy Code, but rather a practical description of how existing bankruptcy laws can provide financial relief. High U.S. healthcare costs often cause significant financial strain, even for insured individuals. When medical expenses become unmanageable, individuals can seek relief through Chapter 7 or Chapter 13 bankruptcy. This article explains how medical debt is addressed within these standard procedures.

Bankruptcy Chapters Addressing Medical Debt

Individuals primarily use two types of personal bankruptcy to address substantial medical debt: Chapter 7 and Chapter 13. Chapter 7, or liquidation bankruptcy, aims to discharge most unsecured debts quickly, typically within months. To qualify for Chapter 7, an individual must generally pass a “means test,” which evaluates their income against the median income for their state and household size. If an individual’s income is below the state median, they typically qualify; if above, further calculations determine if they have sufficient disposable income to repay debts.

Chapter 13, a reorganization bankruptcy, allows individuals with regular income to create a repayment plan for debts over three to five years. This chapter is often suitable for those who do not qualify for Chapter 7 due to higher income or who wish to protect specific assets like a home from liquidation. Eligibility for Chapter 13 also depends on specific debt limits, which are adjusted periodically. For cases filed between April 1, 2025, and March 31, 2028, the unsecured debt limit is $526,700, and the secured debt limit is $1,580,125.

Under a Chapter 13 plan, debtors make structured payments to creditors according to a court-approved schedule. This allows debtors to retain assets while working towards financial stability. The court oversees the plan, ensuring payments are made over the designated period. Both Chapter 7 and Chapter 13 offer pathways to address overwhelming financial burdens, with the choice depending on an individual’s income, assets, and specific financial goals.

Dischargeability of Medical Debt

Medical debt is unsecured debt, similar to credit card balances, and is typically dischargeable in both Chapter 7 and Chapter 13. In a Chapter 7 filing, qualifying medical debt is usually eliminated entirely, providing a complete release. There is no specific cap on the amount of medical debt that can be discharged in Chapter 7, making it a viable option for those with substantial bills.

For Chapter 13 filers, medical debt is incorporated into the court-approved repayment plan. While a portion of medical debt may be repaid over the three-to-five-year plan, any remaining balance is typically discharged upon successful completion. This provides significant relief, as many individuals pay only a fraction of their total medical bills.

It is important to understand that not all types of debt are dischargeable in bankruptcy. Debts such as most student loans, child support, alimony, recent tax obligations, and debts arising from fraud are generally not eliminated. The ability to discharge medical debt distinguishes it from these other categories, offering a clear path to financial recovery for those burdened by healthcare costs.

Exemptions and Asset Protection

When filing for bankruptcy, individuals can protect certain property from being sold to pay creditors through bankruptcy exemptions. These exemptions are laws designed to ensure debtors retain essential assets needed for a fresh start. Common categories of assets that are often exempt include:

A portion of equity in a primary residence (homestead exemption)
A certain value in a motor vehicle
Household goods like furniture, clothing, and appliances
Tools necessary for one’s trade or profession

Retirement accounts, such as IRAs and 401(k)s, are largely protected, often up to their full value or with high limits. Additionally, benefits like Social Security, unemployment, and veteran’s benefits are generally exempt. The specific exemption amounts and types of property protected can vary significantly, as debtors typically choose between federal bankruptcy exemptions or their state’s exemptions, depending on what their state allows. Some states require filers to use state-specific exemptions, while others offer a choice.

A bankruptcy trustee oversees the bankruptcy estate, identifying and liquidating non-exempt assets to distribute proceeds among creditors in Chapter 7 cases. However, for many individuals filing due to medical debt, a significant portion, if not all, of their assets may be fully protected by these exemption laws. In Chapter 13, while assets are not liquidated, the value of non-exempt property can influence the amount required in the repayment plan.