Medical Debt and Bankruptcy

Medical debt can be overwhelming. Hospital bills, doctor bills, prescriptions – it all adds up so fast. What do you do when you simply can’t pay the medical bills? For many folks, the answer is bankruptcy. This article will explain how medical debt relates to bankruptcy, the pros and cons, and what you need to know if you’re considering bankruptcy because of medical bills.

What is Medical Bankruptcy?

There’s no special bankruptcy process just for medical debt. When you file for bankruptcy, you list all your debts, including credit cards, mortgages, medical bills, etc. The court doesn’t care where the debt came from – it just looks at the total amount you owe versus your income and assets.

But informally, “medical bankruptcy” refers to when medical bills are the main reason someone files for bankruptcy. Research shows that medical debt plays a role in 62% of bankruptcies. Even if you have other debts, crushing hospital or doctor bills are often the last straw that pushes folks into bankruptcy.

The Two Main Types of Bankruptcy

There are two primary options for consumers filing bankruptcy:

• Chapter 7 bankruptcy – This type “erases” many of your debts. The court appoints a trustee who liquidates some of your assets and uses the proceeds to pay back creditors. After this, eligible debts are discharged.
• Chapter 13 bankruptcy – This is more like a debt repayment plan. You get to keep your assets but must pay back part of what you owe over 3-5 years. After you finish the repayment plan, eligible debts are discharged.

Both types allow you to get rid of medical debt, but in different ways. Let’s look at how medical bills are treated in each process.

Medical Debt in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, medical bills are treated just like any other unsecured debt – credit cards, personal loans, etc. This means they are likely to be discharged, or wiped out, when your case is complete.

The trustee liquidates your assets and uses the proceeds to pay back creditors. Secured debt, like your mortgage or car loan, must be paid first. Any money left goes to priority unsecured debts like child support or taxes. Finally, non-priority unsecured debts (like medical bills) get whatever is left. Often, there is little or nothing left by this point.

So while medical bills usually get little to no payment in Chapter 7 bankruptcy, the remaining balance is discharged. You don’t have to pay it back. This can provide immediate relief if you’re drowning in medical debt.

Medical Debt in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is more about restructuring your debts into an affordable repayment plan. Non-priority unsecured debts like medical bills will likely get pennies on the dollar.

For example, if you owe $20,000 in medical bills and file Chapter 13, your repayment plan may last 5 years. The court will determine you can afford to repay $200 per month. Over those 5 years, you’ll pay back $12,000 total to all creditors. If medical bills make up 50% of your unsecured debt, they’d get around $6,000 of that $12,000. The remaining $14,000 would be discharged when you complete the repayment plan.

The bottom line is medical debt can be included in either type of bankruptcy. But Chapter 7 tends to provide more immediate relief while Chapter 13 provides more gradual, partial relief.

The Pros of Medical Bankruptcy

Filing bankruptcy to deal with medical debt can help in several ways:

• Stops collections calls and lawsuits – The automatic stay stops collections and legal actions related to dischargeable debts.
• Discharges medical debt – Eligible medical debt is wiped out in Chapter 7 or partially repaid then discharged in Chapter 13.
• Allows you to keep assets – Chapter 13 bankruptcy lets you keep property like your home and car.
• Gives you a fresh start – Bankruptcy can help you get back on your feet financially after a medical crisis.

For many folks crushed by medical bills, bankruptcy provides the quickest path to financial recovery. And it immediately halts stressful collections efforts.

The Cons of Medical Bankruptcy

Bankruptcy also comes with some downsides:

• Hurts your credit – A Chapter 7 bankruptcy stays on your credit report for 10 years; Chapter 13 stays on for 7 years. This can make it harder to qualify for credit, loans, housing, etc.
• Risks losing property – In Chapter 7, your non-exempt assets can be liquidated to pay back debts.
• Takes time and costs money – Bankruptcy involves legal fees, paperwork, and attending court hearings.
• Tax implications – Any discharged debt may be considered taxable income.

For these reasons, bankruptcy shouldn’t be taken lightly as an option to deal with medical debt. Try to exhaust other options first, like negotiating with providers and setting up payment plans.

Also keep in mind that bankruptcy provides relief for dischargeable debts. Student loans, alimony, child support and certain taxes cannot be discharged.

Alternatives to Medical Bankruptcy

If your only debts are medical bills, bankruptcy may be overkill. Here are some alternatives to consider first:

• Ask for charity care – Many hospitals have financial assistance programs or charity care options if you meet income limits.
• Negotiate bills and set up payment plans – You may be able to lower your overall bill or set up affordable monthly payments.
• Apply for Medicaid – This government health program covers those with limited income and resources.
• Look into debt consolidation loans – These combine multiple debts into one lower payment.

Exhaust these options before deciding if bankruptcy is your best path forward. And definitely consult with a bankruptcy attorney to discuss your specific situation.

The Bankruptcy Process

If you do opt for bankruptcy, here is a general overview of how the process works:

1. Meet with a bankruptcy attorney – They will advise if you qualify and which chapter is best.
2. File bankruptcy paperwork – This includes forms detailing your debts, income, assets, etc.
3. Attend the creditors meeting – You meet with the trustee and creditors can ask you questions.
4. Wait for discharge – Debts are discharged a few months after filing.
5. Complete repayment plan (Chapter 13 only) – Make payments over 3-5 years until discharge.

The process takes several months. Chapters 7 and 13 have different timelines and requirements to qualify. An attorney can explain the specifics for your situation.

Finding Legal Help

Navigating medical bankruptcy is complex. Having an experienced bankruptcy attorney on your side is crucial. When researching lawyers, look for these traits:

• Specializes in consumer bankruptcy law
• Has experience specifically with medical bankruptcy cases
• Offers free consultations
• Has affordable payment plans
• Gets positive reviews from past clients

Also look for lawyers who seem compassionate and understanding of your situation. You want an advocate who will fight to protect your rights through the bankruptcy process.

Take Control of Medical Debt

Medical debt causes stress for millions of Americans. If your financial situation is spiraling because of health costs, know that bankruptcy is an option. This guide reviewed how medical bills can be discharged through Chapter 7 or Chapter 13 bankruptcy.

Of course, bankruptcy should not be taken lightly given the impact on your credit and finances. Be sure to understand the risks and alternatives. But for some folks, bankruptcy offers the best chance for a fresh start after medical debt has become unmanageable.