Can You File Bankruptcy for Medical Debt?

Medical debt can become an overwhelming financial burden for many individuals and families. While “medical bankruptcy” is a common term, it is not a distinct legal category under federal bankruptcy law. Instead, it refers to using existing bankruptcy provisions, specifically Chapter 7 or Chapter 13, to address debts from medical care. This article explains how current bankruptcy laws offer a pathway for individuals to gain relief from significant medical obligations.

Understanding Bankruptcy as a Solution for Medical Debt

Consumer bankruptcy provides a legal framework to help individuals facing financial distress find relief from debts. This process allows for either debt discharge or payment reorganization through a structured plan. Medical debt, like credit card debt or personal loans, is unsecured debt. This means it is not tied to any specific asset a creditor can seize, such as a home or a car.

Because medical debt is unsecured, it can be included in a bankruptcy filing. The two primary types of consumer bankruptcy for this purpose are Chapter 7 and Chapter 13. Chapter 7 bankruptcy results in the discharge of qualifying unsecured debts, offering a fresh start. Chapter 13 bankruptcy involves a repayment plan for debts, allowing individuals to manage obligations over a set period.

Using bankruptcy for medical debt allows individuals to eliminate these obligations or restructure them into manageable payments. This can alleviate pressure from collection agencies and help debtors regain financial control. While bankruptcy impacts all unsecured debts, medical bills often represent a significant portion of the total debt burden for many filers. Including medical debt within a broader bankruptcy filing provides comprehensive debt resolution.

Determining Eligibility for Bankruptcy

Before initiating a bankruptcy filing, individuals must assess their eligibility, which varies depending on the chosen bankruptcy chapter. For Chapter 7, a primary qualification is passing the “means test.” This test evaluates an individual’s income against the median income for a comparable household size in their state. If an individual’s current monthly income is below the state median, they qualify for Chapter 7.

If an individual’s income exceeds the state median, the means test proceeds to a more detailed calculation. This calculation considers specific allowed expenses, such as living costs, tax payments, and secured debt payments. It determines if there is sufficient disposable income to repay unsecured creditors. If the remaining disposable income falls below a certain threshold over a five-year period, the individual may qualify for Chapter 7. This assessment ensures Chapter 7 is available to those with limited ability to repay their debts.

For Chapter 13, eligibility requires a regular income source and meeting specific debt limits. An individual must demonstrate the capacity to make regular payments towards a repayment plan. Limits exist on the total amount of secured and unsecured debt an individual can have to qualify for Chapter 13. These debt limits are adjusted periodically and amount to several hundred thousand dollars for unsecured debts and over a million dollars for secured debts.

Prior to filing for either Chapter 7 or Chapter 13, all individuals must complete a credit counseling course from an approved agency. This course must be completed within 180 days before the bankruptcy petition is filed. Its purpose is to provide information about managing money and exploring alternatives to bankruptcy. Gathering financial documentation, including income statements, tax returns, a detailed list of all assets and liabilities, and all medical bills, is a preparatory step for filing.

Navigating Chapter 7 and Chapter 13 with Medical Debt

Medical debt is treated distinctly under Chapter 7 and Chapter 13 bankruptcy, offering different avenues for relief. Under Chapter 7, qualifying unsecured medical debts are discharged entirely. This means the filer is no longer obligated to repay these debts once the bankruptcy case concludes, which often occurs within a few months. The process involves a liquidation of non-exempt assets, if any, to repay creditors, though many Chapter 7 cases are “no-asset” cases where no property is sold.

Exempt assets are protected by law from being sold to pay creditors. These exemptions vary by state but commonly include a portion of home equity, a vehicle, necessary household goods, and retirement accounts. Individuals can retain these exempt assets while discharging their medical and other unsecured debts. Chapter 7 aims to provide a financial fresh start by eliminating qualifying debts, including medical bills.

Chapter 13 bankruptcy involves a reorganization of debts into a court-approved repayment plan that spans three to five years. Medical debt, as an unsecured debt, is included in this plan alongside other unsecured obligations like credit card debt. The amount paid to unsecured creditors, including medical providers, is determined by the filer’s disposable income and the value of their non-exempt assets. Debtors make regular payments to a bankruptcy trustee, who then distributes funds to creditors according to the approved plan.

Upon successful completion of the Chapter 13 repayment plan, any remaining balance of the included medical debt, along with other dischargeable unsecured debts, is discharged. This means that even if only a portion of the original medical debt was paid through the plan, the remaining amount is eliminated. Chapter 13 is suitable for individuals with a steady income who do not qualify for Chapter 7 or who wish to protect specific non-exempt assets, such as a home, by catching up on missed payments through the plan. The choice between Chapter 7 and Chapter 13 depends on the individual’s financial circumstances, income, assets, and overall debt structure.

The Bankruptcy Filing Process

Once eligibility is confirmed and financial documentation compiled, the formal bankruptcy filing process begins. The initial step involves preparing the bankruptcy petition and a comprehensive set of schedules. These documents provide a detailed snapshot of the filer’s financial situation, including income, expenses, assets, and a complete list of all creditors and debts, including medical bills. It is important to list all outstanding debts, as only debts included in the petition can be considered for discharge.

After the petition and schedules are prepared, they are filed with the federal bankruptcy court where the filer resides. A filing fee, which can range from approximately $338 for Chapter 7 to $313 for Chapter 13, is required at the time of filing. It may be paid in installments or waived for low-income individuals. Upon filing, an automatic stay immediately goes into effect, legally prohibiting most creditors from continuing collection activities, such as phone calls, lawsuits, wage garnishments, and foreclosures.

A mandatory Meeting of Creditors, also known as the 341 meeting, is scheduled approximately 20 to 40 days after the petition is filed. During this meeting, the filer meets with the bankruptcy trustee and any creditors who choose to attend. The trustee’s role is to verify the information in the bankruptcy petition and ask questions under oath about the filer’s assets, debts, and financial affairs. This meeting lasts only a few minutes and is a formal part of the process.

Following the 341 meeting, individuals must complete a debtor education course, also known as a financial management course, from an approved provider. This course focuses on budgeting and financial planning and must be completed before a discharge can be granted. Failure to complete this course will prevent the discharge of debts. Once all requirements are met, including the expiration of certain waiting periods, the bankruptcy court will issue an order of discharge, releasing the filer from the obligation to pay specified debts, including medical expenses.

Immediate Financial Considerations After Bankruptcy

Upon receiving a bankruptcy discharge, particularly concerning medical debt, individuals experience a direct financial impact. Discharged medical debts are eliminated, meaning the filer is no longer obligated to make payments on them. This cessation of payment obligations provides immediate relief from the financial strain caused by healthcare costs. The discharge order serves as a permanent injunction against creditors attempting to collect on these debts.

The bankruptcy filing and subsequent discharge will be reflected on the individual’s credit report. A Chapter 7 bankruptcy remains on a credit report for up to 10 years from the filing date. A Chapter 13 bankruptcy, due to its repayment plan structure, remains for up to 7 years from the filing date. While this impacts credit scores initially, the elimination of medical debt obligations can improve an individual’s debt-to-income ratio, aiding future financial recovery.

Concerning assets, the outcome depends on the type of bankruptcy filed. In a Chapter 7 case, any non-exempt assets identified during the process would have been liquidated by the trustee to pay creditors. However, most Chapter 7 filers retain all their property due to available exemptions. In a Chapter 13 case, filers retain all their assets as they are part of the repayment plan, and no liquidation occurs. The handling of assets is a consequence of the chosen bankruptcy chapter and is finalized upon discharge.