Can You Clear Medical Debt in Bankruptcy?
In the United States alone, 1 in 10 people (about 23 million adults) owe a minimum of $250 worth of medical debt. You can discharge medical debt if you declare Chapter 7 or Chapter 13 bankruptcy. Chapter 7 and Chapter 13 are kinds of consumer bankruptcy. Your debt management results will vary depending on which type of bankruptcy you file.
Medical bills are considered nonpriority or general unsecured debt. A Chapter 7 bankruptcy can eliminate all medical and credit card debt, so it might be an approach to pay health care costs on credit cards, which later develop into increased credit card debt. Please note that medical bills themselves are generally dischargeable debts.
A Chapter 13 bankruptcy will help you get rid of medical debt and give you more time to repay the remaining balance via a payment plan. 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. Unlike filing for Chapter 13, there is generally no limit on how much debt relief you can get for medical costs and medical care. Additionally, there is no repayment plan to repay these debts.
You must 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 need more disposable income to cover certain expenses.
Remember that bankruptcy will generally not discharge student loans or child support, and you must keep covering your health insurance during the bankruptcy. Sometimes, the bankruptcy courts will use automatic wage garnishment from your paycheck to cover costs and other debts not dismissed in Chapter 7.
Filing Chapter 13 for Medical Debt
Chapter 13 will discharge some of your medical debt by combining all your debt, but you still need to pay some of this overall debt back to lenders. It requires a repayment plan created based on your bills, income, assets, equity, and other expenses. You may only qualify for Chapter 13 if you can pay your bills and monthly payments to your creditors.
Unlike Chapter 7, note that a Chapter 13 bankruptcy has debt limits. These limits change every few years, but the current debt limit is $465,275 for all unsecured debts (not just medical). If your debt is less than this, you can file for Chapter 13 and have most of your medical debt dismissed while generally only paying back a fraction of the debt you owe.
For example, depending on your debt amount, you might have 70% of the debt dismissed, but your debt repayment may total 30%. The percentages will change based on your debt, income level, and the bankruptcy courts in your state.
Secured vs. Unsecured Debts
Any debt that has collateral is a secured debt. Examples of secured debt are things like a house loan or car loan. If you cannot afford to pay this loan, the creditor is secured in getting their money back because they can seize the property. This is how foreclosure occurs, for example.
Unsecured debt, on the other hand, is debt with no collateral. In this case, there is no tangible property that a creditor can seize. This includes credit card debt, medical bills, utility bills, etc. The right to a discharge in a Chapter 7 case is not absolute. Other options may be considered.
Unsecured debt and secured debt are both different than priority debts. A priority debt cannot be discharged, does not pay for any property, and must be paid back. This includes:
- Student loans
- Court-ordered fines
- Spousal support/alimony
- Child support payments
Your total debt may be a combination of these three types of debt.
Feeling Lost in Medical Debts?
The good news is that you can file bankruptcy on medical bills. You can also look into credit counseling assistance programs or have a phone consultation with a bankruptcy attorney if you are starting your medical bankruptcy journey.
Bankruptcy filings are unavoidable in many medical debt situations. Getting professional help early on can help repair your credit score, free yourself from debt collectors, and set you on the right path to a fresh start. Contact an attorney who knows the ins and outs of bankruptcy laws to help you with your bankruptcy case.
An attorney can also counsel you on the following:
- 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 financial assistance with medical expenses
- What to expect on your credit report after filing for bankruptcy
- Bankruptcy: Counseling Before Filing
- Can I Keep My Home After Filing Bankruptcy?
- Can Filing for Bankruptcy Clear Credit Card Debt?