Can You File Bankruptcy on Medical Debt?

Medical debt can lead to significant financial distress for many individuals. When these expenses become overwhelming, bankruptcy often provides a path to relief. Filing for bankruptcy can eliminate the personal obligation to pay medical debts, offering a fresh financial start. This article explores how medical debt is handled within the bankruptcy system and the steps involved in seeking this relief.

Understanding Medical Debt and Bankruptcy Options

Medical debt is categorized as unsecured debt, similar to credit card balances or personal loans. This classification means it is not tied to any specific property or asset, making it eligible for discharge in bankruptcy. Individuals primarily consider two main types of consumer bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy involves the liquidation of non-exempt assets to pay creditors. This process provides a quick discharge of eligible debts, usually within a few months. To qualify for Chapter 7, an individual must pass a “means test,” which assesses their income against the median income for their state and household size. If income exceeds the median, a further calculation determines if there is sufficient disposable income to repay debts, potentially making Chapter 7 unavailable.

Conversely, Chapter 13 bankruptcy involves a reorganization of debts through a court-approved repayment plan lasting three to five years. This option is available to individuals with a regular income who can afford to make payments toward their debts. Medical debt is treated as a non-priority unsecured debt within a Chapter 13 plan, meaning it is often paid after secured and priority debts. Successful completion of the repayment plan leads to the discharge of remaining eligible debts.

Gathering Information and Documentation for Filing

Initiating a bankruptcy filing requires careful compilation of financial information. A comprehensive list of all creditors is necessary, including medical providers, along with account numbers and the precise amount owed. This ensures all relevant debts are properly addressed in the bankruptcy petition.

Proof of income is essential, including pay stubs for the six months preceding the filing and tax returns for the most recent two years. Filers must also provide a detailed list of all assets, such as real estate, vehicles, bank accounts, and personal property, alongside a comprehensive breakdown of monthly living expenses. Any recent significant financial transactions, such as large payments to creditors or property transfers, must also be disclosed. This collection of documents forms the basis for the bankruptcy forms and schedules, ensuring accuracy.

Navigating the Bankruptcy Filing Steps

The bankruptcy process begins with mandatory pre-filing credit counseling from an approved agency. This counseling must be completed within 180 days before the bankruptcy petition is filed with the court. After completing counseling and preparing all necessary forms, the individual submits these documents to the bankruptcy court.

Upon filing the petition, an “automatic stay” immediately goes into effect, which temporarily halts most collection efforts by creditors, including medical providers. This stay provides immediate relief from phone calls, letters, lawsuits, and wage garnishments. A crucial step is the Meeting of Creditors, also known as the 341 meeting. During this meeting, the debtor meets with a court-appointed trustee and answers questions under oath about their financial situation. Following this meeting, a post-filing debtor education course on personal financial management is required before a discharge can be granted.

Discharge of Medical Debt

Discharge in bankruptcy signifies the legal elimination of a personal obligation to pay a debt. Medical debt is considered dischargeable in both Chapter 7 and Chapter 13 bankruptcy proceedings. In a Chapter 7 case, medical debt is fully discharged upon the completion of the case, which often occurs within a few months. There is no legal limit to the amount of medical debt that can be discharged in Chapter 7.

For Chapter 13 filings, medical debt is discharged upon the successful completion of the three-to-five-year repayment plan. While a portion of the medical debt might be repaid through the Chapter 13 plan, any remaining balance is discharged once the plan concludes. Once a medical debt is discharged, creditors, including medical providers, are legally prohibited from attempting to collect it. This provides a permanent resolution to the financial burden of medical expenses.