Are Medical Bills Discharged in Bankruptcy?
Understand if and how medical debt can be eliminated through the bankruptcy process. Gain clarity on discharging healthcare bills.
Medical bills can become a substantial financial burden, often arising unexpectedly. When these expenses become unmanageable, debt relief becomes a priority. Bankruptcy is a legal process helping individuals overcome overwhelming debt, providing a financial fresh start. This article explores how medical bills are treated within the bankruptcy system.
General Dischargeability of Medical Debt
Medical debt is generally unsecured debt, like credit card balances or personal loans. Unsecured debt is not tied to an asset a creditor can seize, making medical debt a common candidate for discharge in bankruptcy. Federal bankruptcy law has no specific exclusion for medical debt, distinguishing it from obligations like most student loans, recent tax debts, or child support.
Most medical bills are classified as non-priority unsecured debt. They are typically among the last debts repaid if assets liquidate, and are usually fully dischargeable. The absence of collateral makes medical debt more easily dischargeable compared to secured debts, where a lender can repossess property if payments are missed. This classification allows individuals to clear substantial medical debt.
Individual Bankruptcy Chapters
Individuals facing medical debt typically have two bankruptcy options: Chapter 7 and Chapter 13. Each chapter handles medical debt differently, aligning with its overall structure for debt relief. The choice often depends on an individual’s income, assets, and financial goals.
Chapter 7 bankruptcy, known as liquidation, allows qualifying individuals to have most unsecured debts, including medical bills, discharged. This process can provide quick relief, often within three to six months. To qualify, individuals must pass a “means test,” which assesses income and expenses to determine repayment ability. While some assets may be liquidated, many essential assets are often exempt, allowing debtors to retain items like a portion of equity in a home or vehicle, clothing, and tools necessary for work.
Chapter 13 bankruptcy involves a reorganization plan where individuals with regular income make payments to creditors over three to five years. Medical debt is included in this plan, and often, only a fraction is repaid. The remaining balance is then discharged upon successful completion. Chapter 13 is chosen by individuals who do not qualify for Chapter 7 due to higher income or who wish to protect specific assets from liquidation.
Circumstances Affecting Discharge
While medical debt is generally dischargeable, certain circumstances can complicate or prevent its discharge. These situations address particular types of debt or debtor conduct. Understanding these conditions helps anyone considering bankruptcy for medical expenses.
One circumstance involves debt incurred through fraud or misrepresentation. If medical debt was obtained by fraudulent means, like misrepresenting identity for services, it may be non-dischargeable. A reaffirmation agreement is a voluntary agreement by a debtor to continue paying a specific debt even after bankruptcy. If a medical debt is formally reaffirmed with court approval, it is not discharged, making the debtor personally liable post-bankruptcy.
Medical debt converted into certain court orders or judgments could also be affected. While rare for typical medical bills, debts from willful and malicious injury to another person or property, or from certain criminal fines, may not be dischargeable. If a judgment against the debtor for medical debt falls into these categories, its dischargeability may be challenged. Standard medical bills are almost universally unsecured, meaning this scenario is exceedingly uncommon.
Post-Discharge Status of Medical Debt
Once medical debt is discharged through bankruptcy, its legal status changes. A discharge order legally releases the debtor from personal liability. This means the debtor is no longer legally required to pay the discharged amounts, and medical creditors are permanently prohibited from attempting to collect them.
The discharge acts as a permanent injunction against any collection efforts, including phone calls, letters, or legal actions. Creditors are expected to update credit reports to reflect the discharged status, though this process may not be instantaneous.