Understanding Bankruptcy and Medical Debt

At times, life can be very unpredictable. No one sees a major medical emergency or illness coming. An extended stay in a hospital or rehabilitation center can alter your life and your family’s lives forever – not to mention are extremely expensive.

Even for those of us with medical insurance, high-deductible insurance plans require that the patient pay a heavy percentage of their medical costs. At a time when you are already suffering and working may be impossible, the medical bills will begin to pile up. Unpaid medical debt is one of the leading causes of bankruptcy filings in this country even for the most financially responsible among us.

Discharge of Medical Debt in Chapter 7:

When you file for Chapter 7 bankruptcy as an individual, your debt will be assigned a priority level based on whether the debt is deemed secured or unsecured debt. Unsecured debt generally has no collateral attached to it to guarantee collection and thus this type of debt is a low priority for the bankruptcy trustee to pay back to creditors.

Medical bills are considered unsecured debt with a low priority and therefore may be more easily discharged in a bankruptcy filing. Even if you are required to pay a portion of your medical debt in Chapter 7 bankruptcy, the remainder will be discharged or wiped out completely by your filing.

Limitations to Medical Debt Discharge in Chapter 7

There is no limit or cap to the amount of medical debt you are entitled to discharge in Chapter 7 bankruptcy. However, you must still initially qualify to file for a Chapter 7 type bankruptcy in order to attempt to have your medical debt discharged.

“Medical Bankruptcy”

There is no such thing as filing for a “medical bankruptcy.” You must either file for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code.

It may be true that you are filing bankruptcy because your medical debt has piled up and you have no way of paying the high bills but when you file for bankruptcy properly under the Code, you must list any and all the debt you owe. This will include debts like your credit cards and mortgage payments, in addition to your medical bills.

Chapter 13 Bankruptcy and Medical Debt

Medical debt may be totally discharged when you file for Chapter 7 bankruptcy. However, when you file for Chapter 13 bankruptcy, medical debt is not simply wiped away.

When you file for a Chapter 13 bankruptcy your intention is to reorganize your debt. You will be required to make monthly payments to your creditors based on a court approved payment plan over the course of 3 to 5 years. Medical debt then is grouped with the rest of your unsecured debt in your payment plan and paid out to creditors on a monthly basis.

Limitations to Medical Debt Discharge in Chapter 13

Similarly to Chapter 7, there is no limit to the amount of medical debt you are able to reorganize. If your only debt is medical bills, your entire Chapter 13 monthly payment will go towards paying those medical creditors.

However, as with Chapter 7, a Chapter 13 filer must initially qualify in order to properly file. A Chapter 13 bankruptcy is only available to someone with $383,175 or less in unsecured debt (in 2015). Most people have less than this amount in unsecured debt and easily qualify. But please note, considering the current high cost of medical care it is not impossible for someone to exceed this qualifying amount in medical debt and therefore be unable to file under Chapter 13.

A qualified bankruptcy attorney will be able to help you to ensure you meet all requirements before filing either for either Chapter 7 or Chapter 13.