Medical Debt Bankruptcy: Chapter 7 vs 13, Alternatives & Strategic Considerations

Medical debt is the #1 cause of U.S. personal bankruptcy (~62% of filings). As unsecured debt, it is fully dischargeable in both Chapter 7 and Chapter 13—but the choice has lasting consequences.

Chapter 7 (Liquidation) – "Fresh Start"

• Eligibility: Pass means test (income < state median) or disposable income insufficient for Chapter 13.
• Timeline: 4-6 months filing → discharge.
• Medical Debt Outcome: 100% discharged (except fraud).
• Asset Impact: Non-exempt assets liquidated (rare; most filers keep all property via exemptions).
• Credit Hit: 10 years on report; score drop 130-240 points.

Chapter 13 (Reorganization) – "Wage Earner Plan"

• Eligibility: Regular income; unsecured debt < $465,275 (2024 limit).
• Timeline: 3-5 year repayment plan.
• Medical Debt Outcome: Paid pro-rata (often pennies/dollar); remainder discharged at completion.
• Asset Protection: Keep all assets; catch up mortgage/car arrears.
• Credit Hit: 7 years on report; less severe than Chapter 7.

Critical Pre-Bankruptcy Alternatives

1. Hospital Financial Assistance (Charity Care): Non-profit hospitals must offer. Covers 100-400% FPL. Apply before collections.
2. Negotiated Settlement: Offer 25-50% lump sum; get "paid in full" letter. Taxable income on forgiven amount (Form 1099-C) unless insolvent.
3. Payment Plans: Interest-free, extended terms (many hospitals offer 24-60 months).
4. Medicaid Retroactive Coverage: Covers 3 months prior to application if eligible.
5. Credit Counseling (Required Pre-Filing): May yield debt management plan (DMP) with reduced interest.

Strategic Decision Framework

Scenario	Preferred Path
Low income, few assets, overwhelming debt	Chapter 7
Home equity at risk, steady income	Chapter 13
Debt < $10k, negotiable	Settlement/DMP
Recent hospitalization, uninsured	Charity care application FIRST

Consult a bankruptcy attorney (most free initial consult). Do not file pro se—procedural errors risk dismissal with prejudice.