Medical Debt and Bankruptcy
Year after year, medical debt is the first or second most common form of debt held by people who file for bankruptcy. Healthcare costs in America are shockingly high, and an extended illness, serious injury, or hospitalization can put people in a position where they are unable to pay their doctor bills and still manage their households. This guide explains how medical debt is handled in bankruptcy, outlines key exemptions that protect assets like your home or vehicle, and reviews California’s new law this year regarding how medical debt is reported to credit agencies. For advice and assistance regarding medical bills and how they can be resolved by filing Chapter 7 or Chapter 13, contact the Ventura bankruptcy attorneys at Rounds & Sutter, LLP, serving clients in Oxnard, Camarillo and throughout Ventura County in Southern California.
Medical Bills in Bankruptcy
Medical bills are generally treated like other unsecured, non-priority debts when you file for bankruptcy. In other words, they are debts you owe, but they are not secured by collateral and do not enjoy priority status over debts the way tax liens or child support do. Because medical bills often accumulate rapidly, include interest, and can lead to collection actions or lawsuits, bankruptcy provides relief both from the debt itself and from continuing pressure such as wage garnishment or ongoing collection lawsuits.
A Chapter 7 bankruptcy lets you discharge most medical bills. That means they are legally eliminated and no longer owed, and the creditor cannot continue collection through the bankruptcy estate.
If filing under Chapter 13, you can include medical debt in your plan of repayment over three or five years, and after completion of the plan, any remaining qualifying medical debt may be discharged.
How California Bankruptcy Exemptions Protect Your Home, Car and Other Valuable Assets
One of the common concerns for anyone considering bankruptcy is, “Will I lose my house or car because of medical debt?” The good news is that California has robust exemption systems that allow you to protect essential property even when discharging medical bills or other unsecured debt. When you file for bankruptcy in California, you must choose which set of exemptions to apply to your case. These are known as the “703” and “704” systems, and it is very important to understand how they operate so that you choose the right set of exemptions for your particular case. For example, you may be able to protect your home equity, car equity, household goods, tools of trade, and other categories of personal property.
How bankruptcy protects your property while eliminating debt also depends on which form of bankruptcy you choose. If your only major debt is medical bills and you have modest assets protected under the exemption scheme, a Chapter 7 filing may allow you to discharge the bills while keeping your house and car. In Chapter 13, you can pay off unsecured debts like medical bills at a reduced rate while keeping your assets and making payments over time, giving you both asset protection and debt relief.
Filing under the correct chapter and choosing the right set of exemptions for your particular situation can ensure that you keep your house and car, so long as you keep up with mortgage or loan payments or include them in your repayment plan. Ridding yourself of unsecured debt like medical bills helps you afford those essential payments.
How SB 1061 Changed the Game for Medical Debt in California
A major development for California residents is Senate Bill 1061 (SB 1061), signed into law last year on September 24, 2024. This legislation changes how medical debt may appear in your credit records and affects how it may impact you financially (though it doesn’t change how medical debt by itself is handled in bankruptcy).
Starting January 1, 2025, consumer credit reporting agencies in California may not include information about medical debt in a consumer credit report. The law further prohibits a person who uses a consumer credit report from treating medical debt already listed in a credit report as a negative factor in a credit decision.
From July 1, 2025, any contract creating a medical debt in California must include the following specific language: “A holder of this medical debt contract is prohibited by Section 1785.27 of the Civil Code from furnishing any information related to this debt to a consumer credit reporting agency. In addition to any other penalties allowed by law, if a person knowingly violates that section by furnishing information regarding this debt to a consumer credit reporting agency, the debt shall be void and unenforceable.”
These provisions provide strong protections for people who are already struggling with medical debt, ensuring they are not punished further by the fact that they carry such debt, which is often beyond the ability of the debtor to control. So even if you have medical debt, that debt itself will no longer hurt your credit score via reporting in the way it used to after January 1, 2025.
This law, while important to your credit score, doesn’t replace or eliminate the value of bankruptcy relief. If your medical debt is already large and you’re struggling to make ends meet, filing bankruptcy may still be the best solution, while the SB 1061 protections may help avoid future credit-reporting damage.
What to Do Next
If medical debt is causing you stress, preventing you from paying bills, threatening wage garnishment or lawsuits, or endangering your home or car, you don’t need to wait until disaster strikes to take action. A bankruptcy filing now may offer immediate relief; at the same time, California’s new protections under SB 1061 help you prevent future harm from medical debt in your credit profile.
Here’s how to move forward:
- Pull together a complete list of your medical bills, the providers, the amounts, what is outstanding, and whether any is in collections.
- Gather information about your assets, including any home equity, car equity, personal property, income and expenses, so you and your attorney can evaluate applicable exemptions under California law.
- Ask about your options: Is Chapter 7 better (and do you qualify), or is Chapter 13 more appropriate given your income and assets?
- Ask how SB 1061 may protect you going forward: Are there contracts you’re entering that must include the required language? Do you need to dispute improper credit reporting of medical debt?
- Choose an experienced bankruptcy attorney to guide you, help you file properly, and protect your rights.
At Rounds & Sutter, LLP, we help individuals in Ventura County file for bankruptcy, discharge medical debt, protect their homes and cars, and rebuild their credit. If you’re dealing with burdensome medical debt and need help exploring your options, please contact us for a free consultation. A fresh financial start is within reach.