So you have a stack of bills you can’t pay.

What should you do? File bankruptcy, right?

Not exactly.

In fact, filing for bankruptcy could be the worst thing you could do, and here’s why.

The #1 Reason People file Bankruptcy: Unpaid Medical Bills

According to, the number one reason people file for bankruptcy is because of medical bills. Approximately 643,000 Americans filed for bankruptcy because of medical debt each year.

If you have tens of thousands of dollars in unpaid medical debt that you could never pay off, it makes sense to file bankruptcy. Most people would say yes, but there is another option that is way better and cheaper!

How Collection Agencies Get Your Debt

When you fail to pay a bill, the creditor will eventually sell the debt to a third-party collection agency. They make money by collecting more on the debt than paying for it, which is easy because collection companies buy debt for just pennies on the dollar. They will call, send letters, and may even report the delinquent account to the Credit Bureaus. It may seem like the only way out is to file for bankruptcy?

What would happen if you didn’t pay?

What if you just ignored the calls and letters? Would the creditor sue you? No. It’s very, very highly unlikely a debt collector would sue a consumer over an unpaid medical debt that they paid a fraction of the amount owed. They have tens of thousands of other consumers that are willing and able to make payments. The calls and letters will continue to come.

1. You can stop all calls and letters from collection agencies

collection accounts bankruptcy chapter 7

You can stop calls and letters from creditors and collection agencies by writing a letter. In the letter, state that you no longer wish to receive calls or letters about the debt you allegedly owe. Send the letter via certified mail with a return receipt. The collection company must stop all calls and letters according to the Fair Debt Collection Practices Act. If they continue to do so, you can file a complaint with the FTC

2. Collection agencies are unlikely to sue

The collection agency didn’t sustain the loss; they only paid a fraction of the amount owed. Why would they invest the time, resources, and money into trying to collect on one account?

This is why collection agencies rarely sue consumers. The same holds true for most any other collection account. If you get sued over an unpaid debt, it is usually by the original creditor when there is a high unpaid balance, such as owing $15,000 to Bank of America.

If they do sue you, contact them to see if you can work out a settlement. They are very likely to work with you and potentially allow you to pay less than what they claim you owe instead of hiring an attorney and paying court costs, etc. They really don’t want to do that.

3. Filing for Bankruptcy Ruins Your Credit

When you file for bankruptcy, you’re giving your credit the death penalty. The bankruptcy and all of the accounts included in the bankruptcy will appear on your credit report for the next 7 years. Even a few years down the road, creditors will see you as high risk.

You’ll have a hard time getting new lines of credit or loans for many years. Most people understand this. However, they’re told they have no other options and have to file bankruptcy if they can’t pay their debts. False!

4. Your Credit Recovers Faster if You Don’t File Bankruptcy

Should I file for bankruptcy

If you do not file for bankruptcy and ignore the collection agencies, the credit damage you suffer will actually be less than filing for bankruptcy. Unpaid delinquent accounts are just as bad for your score as delinquent accounts included in bankruptcy. In fact, accounts included in bankruptcy are far worse than a regular unpaid collection.

You may think that $50,000 worth of collection debt is what is hurting your score, and by filing bankruptcy, that unpaid debt will go from $50,000 to 0. The balances will, indeed, show a zero balance. However, unpaid collection debt is not included in the credit scoring algorithm.

It’s the 15 collection accounts that are hurting your score. The number of collection accounts is what impacts your score, not the balances. This is why paying collections does NOT improve your credit score.

Should I file bankruptcy or not

Let’s look at two scenarios.

Joe and Mark both have 15 accounts in collections with a total unpaid balance of $50,000. Joe decides to file bankruptcy; he hires a good attorney for $3,000 and files for a chapter 7 bankruptcy.

Mark decides not to file bankruptcy and instead disputes the negative accounts with the Credit Bureaus. Mark can get 8 of the collections removed from his credit report.

Who do you think is in a better credit situation in 2 years? Joe, who has 15 collection accounts and filed bankruptcy with bankruptcy, marks all over his report. Or Mark, who has 7 unpaid collection accounts that are 2 years old, but no bankruptcy? It’s Mark. Clearly.

If you file bankruptcy, you could qualify for the FHA Back to work program after 12 months.

5. Collections Can Be Removed From Your Report

I’m sure you’ve heard of credit repair; everyone has. But what is credit repair? It’s not what you may think; no attorneys are treating to sue collection agencies or using some genius loophole in the system. All credit repair is, is disputing negative accounts on your credit report with the Credit Bureaus.

The Credit Bureau has 30 days to contact the creditor and verify the accuracy of the account. If they cannot validate the item, it must be removed from your credit report entirely. Paying off collections doesn’t help your credit score at all. But, having a collection removed from your report will have a positive impact on your score.

Medical bill collections are even easier to get removed

Medical collections are one of the easiest items to get removed from your credit report. This is because of the HIPA act. HIPAA protects most of your information, so the collection companies don’t have much information about your account. When the Credit Bureau sends a creditor a request for information to validate the account, they may not have it. Or, they may ignore the request.

If they do ignore it, the Credit Bureau will remove the collection account. In my experience, about 50%-60% of all medical collections can be removed by disputing them.

DMP, or debt management program, is also known as Credit counseling

Credit counseling is for people who have credit card debt that has not yet been sent to collections. These companies claim to be non-profit, but they are not. They charge a monthly administrative fee for each account in the program. They will contact your creditors and negotiate lower interest rates and work out a payment plan. However, this is something you can do on your own. For free.

Debt settlement

This is for people with large amounts of collections and medical bills. The debt settlement company will negotiate a settlement for less than the amount you owe. You will pay between 10%-15% of the total amount owed. Typically these companies will cut the amount owed in half. However, this is something you can do on your own as well.

Paying off collections does not improve your credit scores because the collection accounts will remain on your report. They will show a zero balance and a status of paid. The amount and status are not a factor in your credit score; the collection account itself is all the algorithm considers.

Pros and Cons Bankruptcy


  • No longer legally required to repay debt.
  • The collection calls and letters stop.
  • No stress over possibly getting sued
  • You’re not liable to pay taxes on forgiven debts.


  • Bankruptcy appears on your credit report for 7 years.
  • May have to repay up to 50% of debt if a Chapter 7 isn’t granted.
  • Negative accounts will show “Included in Bankruptcy.”
  • Negative accounts still appear on your report and hurt your score.
  • Credit score will drop significantly.
  • Could cost thousands of dollars to hire a bankruptcy attorney
  • Will not be able to obtain new credit for years after a bankruptcy.

When filing for bankruptcy is a good idea

There are situations in which filing for bankruptcy is a good idea. If you have lots of unpaid debts with large banks, like Capital One, Chase, etc. These big banks can and will sue you over large unpaid debts because they have the resources, and they suffered the full loss. If you have many accounts owned by big banks, bankruptcy may be a great option. Or, if you’re facing foreclosure, liens, etc., bankruptcy could help you.

When Should I File for Bankruptcy?

This depends on your situation. If you face major legal matters like judgments, liens, foreclosures, etc., filing bankruptcy may be your best option, and you should speak to a bankruptcy attorney.

If you face unpaid medical bills or other collection accounts, then bankruptcy is not always the best answer. Collection agencies are unlikely to sue, and you can get away without paying them. You can also dispute the collection accounts and have success getting them removed from your credit report.