Medical Bankruptcies are Still a Problem, Here's What to Expect

The Affordable Care Act may give more people access to health insurance, but experts don’t expect it to help solve a major problem in this country: medical bankruptcies.

According to a 2013 study by NerdWallet Health, unpaid medical bills are expected to be the No.1 cause of bankruptcy filings, surpassing both credit card and mortgage debt.

But medical bankruptcy doesn’t just happen to the uninsured. In fact, research shows that many people who file for bankruptcy due to exorbitant medical costs have existing health insurance.

“It’s not just the medical bills it’s really everything around the bills that insurance won’t cover,” says Ethan Austin, co-founder of Internet-based fundraising service GiveForward. He says 78% of people that file for medical bankruptcy had insurance.

He gives the example of a breast cancer patient, citing out-of-pocket costs for a year of treatment coming in around $8,500 to cover things like co-pays, co-insurance and travel to and from the medical facility. The figure doesn’t include lost wages, day care and other expenses associated with treatment. Add a high deductible health insurance plan to the mix, which is what many Americans have, and it’s not surprising people are struggling with mounting medical costs.

Prior to the start of the ACA’s enrollment season on Oct. 1, health insurance was mainly tied to employment. The protracted recession pushed millions of of people out of the workforce without insurance. Sure they could use COBRA for coverage, but the costs associated with that insurance makes it prohibitive to many, particularly the recently laid off.

“Medical expenses have been growing at a rate well above inflation,” says Rocket Lawyer On Call attorney Mazyar Hedayat. “Starting in about 2007/2008, medical expenses went from being a primary component of a lot of cases to becoming the dominate factor in consumer.

When it comes to medical bankruptcy, consumers need to look at it the same way they would for personal bankruptcy, which means their credit will take a hit for as long as 10 years depending on the type they file. Consumers can either file for Chapter 7, which is when assets go into liquidation and the debts are wiped out, or Chapter 13, which reorganizes the debt into a repayment plan.

“The less likely a repayment plan is feasible given your income, the more likely it will be that you file under Chapter 7,” says Chas Rampenthal, LegalZoom general counsel and legal life coach . He says consumers going the Chapter 7 route may be able to file bankruptcy over certain debt but not all of it.

“It is possible to not try and discharge a home mortgage and only discharge medical bills or credit card debt. Generally you have to make the court aware of all your debt and you will have to use what is known as a reaffirmation agreement to waive the discharge of that debt.”

Experts say filing for bankruptcy should be a last resort, and suggest cash-strapped patients try to negotiate with the hospital, seek out help from federal and state entities and look for creative ways to raise money.

But don’t wait too long and end up owing a lot more. “People don’t want to stiff their doctor so they will hang in there as long as they can,” says Hedayat. “I often find people have years and years’ worth of compounded medical expenses.”

For consumers who do decide to file for bankruptcy because of medical debt, Rampenthal says it’s imperative that the problem or problems that caused the bankruptcy are fixed.  If the filing is because of medical costs, it may be good ideas to wait to all those expenses are done with before filing.

“When your debts are discharged, you get a ‘clean slate’ to start over financially,” says Rampenthal.  “If you immediately fall into the same habits that got you into the debt in the first place, you could end up back in debt – only this time you will not have the ability to file for bankruptcy.”