Why Would Someone File for Bankruptcy: Medical Bills and Foreclosure

Someone would file for bankruptcy when their debts have grown so large that no realistic combination of budgeting, negotiation, or repayment can bring them back under control. Filing opens a federal court case that can either wipe out qualifying debts entirely or restructure them into an affordable payment plan. At the same time, an immediate court order known as the automatic stay stops creditors from collecting, garnishing wages, foreclosing, or repossessing property.¹ The situations below are the ones that most often push people to that point.

Overwhelming Medical Bills

Unexpected healthcare costs are one of the leading drivers of bankruptcy filings. A single hospitalization, surgery, or chronic illness can generate tens or even hundreds of thousands of dollars in bills, and insurance does not always cover the full amount. Even with a marketplace plan, the federal cap on out-of-pocket spending reached $10,600 per person, or $21,200 per family, for the 2026 plan year.² When a procedure is denied or an out-of-network provider sends a separate bill, the full cost falls on the patient.

Medical debt is treated as a general unsecured claim, meaning it is not backed by collateral.³ That classification makes it eligible for a complete discharge. Once the court grants the discharge, those bills are legally erased. For families who have already drained savings and retirement accounts trying to keep up with payment plans, that reset is often the point of filing.

Credit Card Balances and Personal Loans at High Interest

Revolving credit card debt is another common trigger. Average credit card interest rates have climbed to record levels, reaching 22.8 percent as of 2023, nearly double the rate from a decade earlier.⁴ At rates like these, minimum payments barely cover the interest, and the balance stays flat or grows no matter how consistently someone pays.

A Chapter 7 filing can eliminate credit card and personal loan balances entirely, with the discharge typically entered about four months after the petition is filed.⁵ If your income is too high to qualify for Chapter 7, a Chapter 13 filing lets you pay back a portion of what you owe through a court-supervised plan lasting three to five years, with the remaining balance discharged at the end.⁶

One timing issue matters here. If you charged more than $900 in luxury goods to a single creditor within 90 days before filing, or took cash advances totaling more than $1,250 within 70 days, those charges are presumed non-dischargeable.⁷ The court assumes those balances were run up in anticipation of filing, and the creditor can challenge their discharge.

Foreclosure or Vehicle Repossession on the Horizon

When you fall several months behind on a mortgage or car loan, the lender can move to foreclose on your home or repossess your vehicle. Filing for bankruptcy triggers the automatic stay, a federal court order that immediately halts all collection activity, including scheduled foreclosure sales and repossession efforts.¹ Even if a sale is set for the following day, the stay stops it.

The stay buys time, but it does not erase secured debt. To keep the property long-term, you typically need a Chapter 13 repayment plan that spreads the missed payments over three to five years while you resume regular monthly payments going forward.⁶ This is often the only realistic path to saving a home once foreclosure has begun.

Bankruptcy also protects a certain amount of equity in your home and vehicle through exemptions. Under the federal exemption system, you can shield up to $31,575 of equity in your residence and up to $5,025 of equity in one motor vehicle.⁷ Many states offer their own exemption systems, some with higher limits, and a handful with unlimited homestead protection. The amount of equity you can protect depends on where you live.

Wage Garnishment and Creditor Lawsuits

A creditor who wins a court judgment against you can garnish up to 25 percent of your disposable earnings each pay period.⁸ For support obligations like child support, the cap is higher, up to 50 or 60 percent depending on circumstances. Losing that much of a paycheck can make rent, food, and utilities impossible to cover.

Filing for bankruptcy activates the same automatic stay that halts foreclosure, and it legally requires garnishment to stop.¹ Your employer must return to paying your full wages once notified of the filing. The stay also freezes any pending lawsuits before a judgment is entered, which prevents creditors from gaining additional leverage. For many people, this is the moment that turns an uncontrollable financial spiral into something manageable.

Job Loss or Divorce

A sudden drop in income, whether from a layoff, medical disability, or the end of a marriage, can turn debts that were perfectly manageable into ones you cannot pay. Unemployment benefits rarely replace a full paycheck, and when a two-income household splits into two separate budgets, neither person may have enough to cover the debts they took on together.

Divorce creates a particular bind because both spouses remain legally responsible for joint debts regardless of what the divorce decree assigns. If an ex-spouse stops paying a credit card that carries both names, the creditor can pursue the other spouse for the full balance. Filing for bankruptcy lets you discharge your personal liability on those joint unsecured debts and start over on a single income.

Debts Bankruptcy Will Not Erase

Not every debt disappears in bankruptcy. Federal law carves out several categories that survive even a successful discharge, and misunderstanding these limits is one of the costliest mistakes people make when deciding whether to file.

Federal and private student loans are not dischargeable unless you file a separate lawsuit within your bankruptcy case and prove that repaying the loans would impose an “undue hardship,” a standard most courts interpret very strictly.⁹
Child support and alimony cannot be discharged under any chapter of bankruptcy.
Income taxes generally survive discharge if the return was due within the last three years, was filed late within the last two years, or involved fraud.
Debts obtained through false statements or misrepresentation are not dischargeable.
Court-ordered criminal fines and restitution survive bankruptcy.
If a court found that you intentionally harmed someone or their property, that judgment is not dischargeable.

If the debts driving your financial crisis fall primarily into these categories, bankruptcy may offer limited relief. An attorney can help you estimate what share of your overall debt would actually be wiped out.

Who Qualifies for Chapter 7

You cannot simply choose to file Chapter 7. Federal law requires a screening called the means test, which compares your household income to the median income in your state. If your income falls below the median for your household size, you pass the test and can proceed with Chapter 7.¹⁰ The court looks at your total income over the six full calendar months before you file, doubles it to get an annual figure, and measures that against published state thresholds that are updated twice a year.

If your income is above the median, a second calculation subtracts allowable expenses, such as housing, transportation, and healthcare based on IRS standards, from your income. When the leftover amount is large enough to fund a meaningful repayment to creditors, the court presumes that a Chapter 7 filing would be an abuse of the system and can dismiss the case or convert it to Chapter 13. Chapter 13 does not require the means test for eligibility, though your income determines whether your repayment plan lasts three years or five.⁶

1
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
2
HealthCare.gov. Out-of-Pocket Maximum/Limit
3
Office of the Law Revision Counsel. 11 USC 101 – Definitions
4
Consumer Financial Protection Bureau. Credit Card Interest Rate Margins at All-Time High
5
U.S. Courts. Discharge in Bankruptcy – Bankruptcy Basics
6
Office of the Law Revision Counsel. 11 U.S. Code 1322 – Contents of Plan
7
Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
8
Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment
9
Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
10
Office of the Law Revision Counsel. 11 U.S. Code 707 – Dismissal of a Case or Conversion