Can You Clear Medical Debt in Bankruptcy?

According to statistics cited by the American Journal of Medicine, medical bills are the primary reason U.S. citizens declare bankruptcy each year. The high cost of healthcare expenses and the amount of out-of-pocket costs mean that chronic illness or catastrophic injury often leaves people with more medical debt than they can afford.

Personal bankruptcy allows you to eliminate medical debt by filing Chapter 7 or Chapter 13 bankruptcy. Chapter 7 discharges all medical bills without repayment, while Chapter 13 discharges most medical debt through a repayment plan. This article reviews which one is more practical for you, and whether a bankruptcy is ideal for someone in your situation.

Medical Debt and the Bankruptcy Process

Medical bills are nonpriority or general unsecured debt. Some people charge medical bills to credit cards, which only makes the situation worse with interest charges. Fortunately, both medical bills and credit card debt are dischargeable in bankruptcy because:

• There is no collateral. You did not provide security like a house or other assets before acquiring the debt, so the creditors must wait for a judgment to receive payment.

• Because there is no collateral, it is “non-priority.” A creditor who has a claim on your house or bank account has priority. They may receive payment before a creditor who does not have that claim.

• Medical debt is “involuntary.” Ill or injured people must get medical treatment, so forcing them into debt to pay off medical creditors is a violation of public policy.

Timing and Type of Debt

All medical bills and credit card debt are fully dischargeable in bankruptcy. They are both considered non-priority, unsecured debt. However, some types of debt may attract more scrutiny than others.

Older medical bills, bills owed to healthcare providers, and medical debt due to long-term treatment or surgeries are least likely to cause issues. Cosmetic surgery and elective procedures can get a second look from bankruptcy trustees. You should consult a bankruptcy attorney if:

• You acquired more than $800 in elective surgery debt within 90 days of filing, or took a cash advance of any kind within 70 days of filing. Creditors can challenge a discharge of this debt.

• If the procedure was purely elective without any reconstructive function, it may get a second look from trustees who suspect you did not plan to pay the bill.

• Financing becomes important. If you put the surgery on a credit card (even a medical credit card like CareCredit) just before filing, it can trigger a fraud investigation.

Although it is unlikely that a cosmetic procedure would cause a court to dismiss your bankruptcy, you should discuss any recent procedures with an attorney, especially if they took place just before you filed bankruptcy.

Alternatives to Medical 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.

Whether you file a Chapter 7 bankruptcy or a Chapter 13, it will affect your credit rating for at least ten years. The question before all bankruptcy filers is whether the amount of medical debt justifies filing for bankruptcy. If your only major financial debt load is the medical debt and you could reasonably pay off your medical bills without filing bankruptcy, you should consider doing so.

Some ways to pay off your health care costs without bankruptcy can include:

• Negotiating directly with the insurance companies or healthcare providers. If you have only one or two creditors, working out a payment plan with the providers directly can have almost the same financial effect as a bankruptcy. If your creditors agree, you may work out a payment agreement that lets you pay a smaller sum over a longer period of time.

• If you have multiple creditors but can still make regular payments, medical debt settlement companies can help you consolidate your debts and negotiate a payment plan. These companies take your payment and parcel it out to various creditors over time. Be careful, as not all are reputable. Some are scammers and some don’t do anything your attorney could not do for you.

• Hospital financial assistance programs will sometimes work with lower-income families to offset some of the bills. They may work with their doctors to forgive some of your bills. The hospital financial office can give you more information if the hospital has this program.

Before leaping into bankruptcy because your finances seem hopeless, get legal advice and consider all your options first. You may not need to file a bankruptcy immediately.

When Bankruptcy Makes Sense for Medical Debt

If you have more than one source of major debt, then bankruptcy is probably the best option. Bankruptcy is a way to clear your financial slate and start over free of all debt. If you have medical debt, credit card debts, or concerns about foreclosure because you cannot pay all your bills and pay your living expenses, then bankruptcy will remove the extra burden and let you get back on track.

Filing Chapter 7 for Medical Debt

Chapter 7, or “liquidation” bankruptcy, will discharge all medical debt. There is no limit on allowable medical costs, and you will not create a payment plan. However, you must give the trustee access to all your assets. The trustee sells anything of value to pay your secured creditors.

There is a means test to qualify for Chapter 7 bankruptcy. Your household income must fall below your state’s annual median income. There are other requirements, such as the exemption list, which varies by state, and rules for filing. If you have few valuable assets and need to clear more than just your medical debts, you should consider a Chapter 7.

Filing Chapter 13 for Medical Debt

Chapter 13, also called a “reorganization,” requires you and the trustee to develop a three- to five-year repayment plan. To file a Chapter 13, you must have enough regular income to pay your living expenses and repay your secured creditors during the plan. At the end of the plan, the court discharges any remaining debt. Chapter 13 bankruptcies have debt limits that are updated annually. They also depend on your state’s property values.

A Chapter 13 is preferable for debtors who have steady incomes and assets they want to keep, like real estate, and need to eliminate unsecured debts so they can resume paying things like mortgages. If the cause of bankruptcy is too many medical expenses keeping you from paying your household costs, then the Chapter 13 may be the thing you need.

After Filing Bankruptcy

Whether you file a Chapter 7 or Chapter 13, some debts cannot be discharged. Student loans, tax debt, and child support and alimony arrears are not dischargeable. If you have health insurance coverage, you must keep paying it during your bankruptcy.

Additional Resources

• Bankruptcy: Counseling Before Filing
• Can I Keep My Home After Filing Bankruptcy?
• Can Filing for Bankruptcy Clear Credit Card Debt?

Get Legal Advice From a Bankruptcy Attorney

You should have a bankruptcy lawyer during the bankruptcy process. Bankruptcy affects more than your credit score. If you do not handle the filing correctly, the court will dismiss it, leaving you with more bills and payment problems than before. Although bankruptcy is a federal matter, state laws affect how you file and what you can claim as an exemption.

Before you file a bankruptcy case, get legal advice from a bankruptcy attorney in your area. The attorney can give you critical advice on debt relief options and help silence debt collectors before you head to court.