Can You Clear Medical Debt in Bankruptcy?
Yes, you can eliminate, or discharge, most medical debts if you declare Chapter 7 or Chapter 13 bankruptcy (two types of consumer bankruptcy).
Medical bills are considered "nonpriority" or general unsecured debt. Chapter 7 bankruptcy can get rid of all medical debt and credit card debt, so it might be the best fit if you paid health care costs on credit cards, which led to increased credit card debt.
Chapter 13 bankruptcy will discharge some of your medical debt and give you more time to pay back the remaining balance. Those with a higher income may need to file for Chapter 13.
Filing Chapter 7 for Medical Debt
Chapter 7 will discharge all medical debt. There is no dollar limit on how much debt relief you can get for medical costs and medical care put on credit cards. There is also no repayment plan to pay back any of these debts.
You do need to pass the Chapter 7 Means Test to qualify for Chapter 7. This test looks at your state's average income and your income minus necessary expenses. If your monthly income is less than the state's median income, you can file for Chapter 7. You can also file if you do not have enough disposable income to cover certain expenses.
Keep in mind that bankruptcy will not discharge student loans or child support, and you will need to keep covering your health insurance during the bankruptcy. In some cases, the bankruptcy courts will use automatic wage garnishment from your paycheck to cover costs and other debts that are not dismissed in Chapter 7.
Filing Chapter 13 for Medical Debt
Chapter 13 will "discharge" your medical debt by lumping all your bills and debt together, but you still need to pay some of this overall debt back. It requires a repayment plan that is created based on your income, bills, equity, assets, and other expenses. You may not qualify for Chapter 13 if you cannot pay your bills and make monthly payments to your creditors.
Unlike Chapter 7, a Chapter 13 bankruptcy has debt limits. These limits change every few years, but the current debt limit is $419,275 for all unsecured debts (not just medical debt). As long as your debt is less than this, you can file for Chapter 13 and have most of your medical debt dismissed while only paying back a fraction of it.
For example, depending on your debt amount, you might have 70% of the debt dismissed but need to pay back 30%. The percentages will change based on your debt, income level, and the bankruptcy courts in your state.
Secured vs. Unsecured Debts
A secured debt is any debt that has collateral, such as a house loan or car loan. It means if you cannot afford to pay for it, the creditor is "secured" in getting their money back because they can seize the property.
Unsecured debt is any debt that does not have collateral behind it. While you might have received a service or purchased an item, it is not a property that a creditor can seize. This includes credit card debt, medical bills, utility bills in your home, and any other common type of debt.
These are both different than priority debts. A priority debt does not pay for any property, cannot be discharged, and must be paid back. This includes student loans, child support payments, taxes, court-ordered fines, and spousal support (also called alimony).
Your total debt may be a mix of these three types. All unsecured debts are dischargeable in Chapter 7 bankruptcy, but not in Chapter 13 bankruptcy (see Chapter 13 section above).
Feeling Lost in Medical Debts?
You can look into credit counseling courses (some are mandatory after you file for bankruptcy) or have a free phone consultation with a bankruptcy attorney if you are just starting your medical bankruptcy journey.
Bankruptcy filings are unavoidable in many medical debt situations. Early on, getting professional help can help repair your credit score and set you on the right foot for a fresh start.
An attorney can also counsel you on:
- Insurance coverage when you are in debt
- Medicaid and Medicare during bankruptcy
- Seeing medical providers after filing for bankruptcy
- Stopping calls from a collection agency or unsecured creditors
- Your rights under the Affordable Care Act during bankruptcy
- Requesting personal loans for medical expenses
- What to expect on your credit report after filing bankruptcy