Can You File Bankruptcy on Medical Bills?
Understand the process of addressing medical debt through bankruptcy, offering a path to financial relief.
Medical debt can present a significant financial challenge for many individuals. When faced with overwhelming medical expenses, understanding available relief options becomes paramount. Bankruptcy offers a structured legal pathway for individuals to address and potentially eliminate various types of debt, including those stemming from healthcare services. This process aims to provide a fresh financial start by discharging eligible obligations under federal law.
Understanding Medical Debt in Bankruptcy
Medical bills are typically classified as unsecured debt, meaning they are not tied to any specific collateral like a car or a home. This classification is important because unsecured debts are generally eligible for discharge in personal bankruptcy proceedings. The two primary types of personal bankruptcy available to individuals for addressing medical debt are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, allows for the discharge of most unsecured debts, including medical bills. This option is generally available to individuals whose income falls below a certain threshold, as determined by the means test. A successful Chapter 7 filing results in a discharge, which legally releases the debtor from personal liability for the discharged debts.
For individuals who do not qualify for Chapter 7 due to higher income, or who wish to protect certain assets, Chapter 13 bankruptcy offers a reorganization option. Under Chapter 13, medical debt is incorporated into a court-approved repayment plan that typically spans three to five years. Debtors make regular payments to a trustee, who distributes funds to creditors. Unsecured medical debts not fully paid through the plan are discharged upon successful completion of the repayment period.
The concept of “discharge” in bankruptcy refers to a permanent legal order that releases the debtor from the personal obligation to pay certain debts. Once a debt, such as a medical bill, is discharged, creditors are legally prohibited from attempting to collect it.
Pre-Filing Requirements and Documentation
Before filing for bankruptcy, individuals must satisfy eligibility criteria and gather financial information. A key Chapter 7 requirement is passing the means test, which evaluates income against the median for a similar household size in their state. If income is above the state’s median, additional calculations determine if there is sufficient disposable income to repay unsecured debts. This test ensures that Chapter 7 is primarily available to those with limited financial capacity.
Another mandatory step before filing any bankruptcy petition is completing an approved credit counseling course. This course must be taken from an approved agency within 180 days prior to filing. The counseling explores alternatives to bankruptcy and educates individuals on financial management. Upon completion, a certificate is issued, which must be filed with the bankruptcy petition.
For those considering Chapter 13 bankruptcy, there are specific limits on the amount of secured and unsecured debt an individual can have. As of 2024, the unsecured debt limit for Chapter 13 is approximately $465,275, and the secured debt limit is around $1,395,875. Exceeding these thresholds would render an individual ineligible for Chapter 13.
Collecting comprehensive financial documentation is an important preparatory step. This includes proof of income, such as recent pay stubs and tax returns. A complete list of all debts, including medical bills, credit cards, and loans, is required. For medical debts, gather accurate account numbers, creditor names, and the precise amount owed to each provider.
Individuals must compile a detailed list of all assets, including real estate, vehicles, bank account balances, investments, and personal property. Information regarding household expenses, such as rent or mortgage payments, utilities, and food costs, must be documented. If there have been any prior bankruptcy filings, those details must be disclosed. Accuracy and completeness of this information are paramount, as it forms the basis of the bankruptcy petition and subsequent court proceedings.
The Bankruptcy Filing and Discharge Process
Once all preparatory steps are complete, the formal bankruptcy process begins with filing the petition. The bankruptcy petition, along with various schedules detailing assets, liabilities, income, and expenses, is submitted to the appropriate bankruptcy court. This submission officially commences the bankruptcy case.
Upon filing, an automatic stay goes into effect. This legal injunction provides relief by halting most collection activities against the debtor, including lawsuits, wage garnishments, and creditor calls. The automatic stay offers a period of protection, allowing the debtor to proceed with the bankruptcy without creditor harassment.
About 20 to 40 days after filing, debtors are required to attend a Meeting of Creditors, also known as a 341 meeting. This mandatory meeting is typically held at the bankruptcy court or a designated location, presided over by a bankruptcy trustee. During this meeting, the debtor is placed under oath and asked questions by the trustee and any creditors who choose to attend, to verify the information in the bankruptcy petition and schedules.
Following the 341 meeting, debtors must complete a mandatory debtor education course. This course, distinct from pre-filing credit counseling, focuses on financial management and budgeting. It must be taken from an approved provider, and a certificate of completion filed with the court for discharge eligibility.
In a Chapter 7 case, the bankruptcy trustee reviews the debtor’s assets to identify any non-exempt property that could be liquidated to pay creditors. Most personal property is typically protected by exemptions. If non-exempt assets exist, the trustee sells them and distributes the proceeds. In a Chapter 13 case, the focus shifts to confirming a repayment plan. The debtor proposes a plan to repay certain debts over three to five years, which the court must approve before payments commence.
The final step in the bankruptcy process is the discharge of debts. For Chapter 7, this typically occurs about 60 to 90 days after the 341 meeting. For Chapter 13, discharge happens after all payments under the confirmed plan have been successfully completed. Once medical bills and other eligible debts are discharged, the debtor is no longer legally obligated to pay them, concluding the bankruptcy proceedings for those obligations.
Citations:
The American Bar Association. “Chapter 13 Debt Limits”. (2024).
U.S. Courts. “Bankruptcy Basics”. (Current as of 2024).