Chen, who is already serving a 20-year jail term for corruption, has been on trial since last year for allegedly taking illegal possession of confidential documents while he was in office.
However, Taipei district court said it had decided to suspend the proceedings after a medical team found that the ailing Chen was unfit to stand trial.
"The defendant suffers from language impairment, minor dementia, severe depression and is suicidal ... He obviously lacks the capabilities to stand trail and cannot attend court due to his illness," it said in a statement.
Doctors have recommended home care for the 62-year-old after he was diagnosed with severe depression, a nerve disorder and other health conditions last year.
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But the justice ministry has said Chen does not qualify for immediate parole on medical grounds as he can receive necessary treatment at the prison hospital.
Chen and his family have been accused of laundering millions of dollars by sending political donations and secret diplomatic funds abroad, and taking kickbacks on government contracts during his 2000-2008 presidency.