When Medical Debt Can Be Included in a Bankruptcy Filing

Filing for bankruptcy can be a difficult decision that involves looking closely at your finances, understanding the different types of bankruptcy, and weighing the pros and cons. For many people struggling with overwhelming medical debt, bankruptcy may provide a path to a fresh financial start. This article will explain how medical debt can potentially be discharged through bankruptcy, as well as some of the key considerations around pursuing this option.

The Link Between Medical Debt and Bankruptcy

Research has shown a clear connection between high medical bills and personal bankruptcy filings. One study from 2000 found that medical debt was tied to nearly 40% of bankruptcies that year[1]. More recently, surveys have suggested that medical issues play a role in over 60% of bankruptcies[6].

With healthcare costs continuing to rise faster than overall inflation, and insurance plans offering less comprehensive coverage, it’s no surprise medical expenses are pushing many families to the financial breaking point. A health emergency or chronic medical condition can quickly devastate someone’s finances through lost income and piling up medical bills.

Is Medical Debt Dischargeable in Bankruptcy?

The good news is that medical debt is generally dischargeable through bankruptcy, meaning it can potentially be eliminated. There’s no special “medical bankruptcy” process – all types of debts are considered together in a bankruptcy case. But medical bills are usually classified as non-priority unsecured debt, making them among the most likely to be discharged[2].

By contrast, some other forms of debt like child support, alimony, most student loans, and recent taxes are more difficult to discharge. Any debts secured by property, like mortgages and auto loans, usually cannot be discharged either. But the lender can still repossess the property if you fall behind on payments.

Chapter 7 vs. Chapter 13 Bankruptcy

If you’re considering bankruptcy to deal with medical debt, you’ll need to decide whether to file under Chapter 7 or Chapter 13 of the bankruptcy code. Here’s an overview of how medical debt is treated in each process:

Chapter 7 Bankruptcy

Chapter 7 bankruptcy allows you to fully discharge many types of unsecured debts like medical bills, credit cards, personal loans, utility bills, etc. Any debts that can’t be eliminated will have their repayment terms modified. You may have to surrender any non-exempt assets for liquidation to pay creditors, but in most Chapter 7 cases the filer has little or no property that isn’t exempt.

The whole Chapter 7 process typically wraps up within 3-6 months. This makes it the quicker and simpler option, but you can only file under Chapter 7 once every 8 years.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves setting up a 3-5 year repayment plan to pay back creditors. The repayment plan allows you to catch up on any past-due secured debt and pay back a portion of your unsecured debts. Medical debt, credit cards, personal loans and other unsecured debts without property backing them will usually see the largest reduction in what you owe. Any remaining unsecured debt is discharged when you complete the repayment plan.

Chapter 13 bankruptcy stops collections calls and wage garnishment, allowing you time to pay back debt through the repayment plan. This can make it easier to hold on to property. But Chapter 13 cases come with more complexity, costs, and time commitment.

The Bankruptcy Process

Filing for bankruptcy involves extensive paperwork and court proceedings. Here are some of the key steps if you move forward with a bankruptcy case:

• Complete pre-filing credit counseling
• Gather information about all debts, income, assets, and expenses
• File the voluntary bankruptcy petition and other forms
• Attend the meeting of creditors where you’ll be questioned under oath
• Complete a debtor education course
• Receive discharge of eligible debt upon case completion

Throughout the process, you’ll be required to fully disclose all debts and financial circumstances, including any medical debt. Attempting to conceal assets or debt is illegal.

Pros of Filing Bankruptcy for Medical Debt

There are some potential benefits to using bankruptcy to deal with medical debt:

• Medical bills and other dischargeable debts can be reduced or eliminated
• Foreclosures, vehicle repossessions, wage garnishment, and debt collection calls are halted
• You get powerful legal protections under the automatic stay
• Interest and penalties stop accruing on dischargeable debts
• You get a fresh financial start after bankruptcy completion

For many people crushed under medical expenses they have no way to pay, bankruptcy can provide a light at the end of the tunnel. It’s a chance to rebuild financial health.

Cons of Using Bankruptcy for Medical Debt

There are also some potential drawbacks to filing bankruptcy:

• Bankruptcy can stay on your credit report for 7-10 years, harming credit scores
• You may have to give up property if you can’t keep up with secured debt payments
• Certain debts like student loans and alimony cannot be discharged
• You must disclose all income and expenses – bankruptcy fraud is illegal
• You may face higher costs to access credit after bankruptcy
• There are legal fees, court costs, and trustee fees to file bankruptcy

For those with assets they want to keep or good credit scores, bankruptcy could do more harm than good. Weighing the pros and cons carefully for your specific situation is key.

Alternatives to Bankruptcy

Bankruptcy is a major, life-altering decision that remains on your record for years. Before taking this step, be sure to explore all alternatives:

• Ask providers for discounts, payment plans, or forgiveness programs
• Consider debt management or credit counseling services
• Explore options to consolidate debt into a lower payment
• Cut expenses and increase income to put more towards debt
• Negotiate directly with creditors to reduce or waive interest

If your financial situation is temporary, these options could potentially help you get back on track without bankruptcy. But if you have very high medical debt relative to income, bankruptcy may be your best chance for a fresh start.

Talk to a Bankruptcy Attorney

Because bankruptcy is such a significant undertaking, it’s essential to understand how it works and make sure it’s the right choice for your unique situation. Speaking with a qualified bankruptcy attorney in your state can provide the legal guidance needed to make an informed decision.

An attorney can analyze your full financial picture, explain what debts can and can’t be discharged, recommend whether to file Chapter 7 or 13 based on your circumstances, and walk you through every step of the bankruptcy process. They will help ensure your rights are protected so you can get the maximum fresh start.

Don’t struggle alone with overwhelming medical bills. A bankruptcy attorney can advise if this path could provide you the financial relief you need to move forward.