Does Bankruptcy Clear Medical Bills?

Bankruptcy offers financial relief for individuals overwhelmed by medical expenses. Medical bills are generally unsecured debt, not tied to collateral, allowing them to be discharged. Filing for bankruptcy can eliminate the legal obligation to pay these debts, providing a fresh financial start.

Discharging Medical Bills Through Bankruptcy

Medical bills are classified as unsecured, non-priority debt in bankruptcy. Unlike priority debts (e.g., taxes or child support), these are among the first to be considered for discharge.

Discharge in bankruptcy is a court order releasing the debtor from personal liability for specific debts. This prohibits creditors from further collection efforts, including lawsuits or calls. Medical debts, along with other unsecured obligations like credit card balances, can often be eliminated entirely.

Understanding Bankruptcy Options for Medical Debt

Individuals seeking medical debt relief can choose between Chapter 7 and Chapter 13 bankruptcy, depending on their income, assets, and financial goals.

Chapter 7 Bankruptcy

Chapter 7, or liquidation bankruptcy, discharges most unsecured debts, including medical bills, without a repayment plan. Qualification requires passing a “means test,” which evaluates if monthly income is below the state’s median. If income exceeds the median, disposable income is assessed; high disposable income may disqualify an individual. Chapter 7 cases are generally quicker, with a discharge often granted within three to six months after filing.

Chapter 13 Bankruptcy

Chapter 13, or reorganization bankruptcy, involves a court-approved repayment plan over three to five years. This option suits individuals with regular income who don’t qualify for Chapter 7 or wish to protect assets like a home. Under a Chapter 13 plan, medical bills are grouped with other unsecured debts, repaid through scheduled monthly payments. Upon successful completion, any remaining balances on dischargeable debts are eliminated, allowing debtors to manage obligations while retaining property.

Information to Gather for a Bankruptcy Filing

Preparing for bankruptcy involves compiling financial documents and information. This collection is crucial for accurately completing the petition and schedules, providing a clear picture of financial standing to the court and trustee.

• A complete list of all creditors, including medical providers, account numbers, and amounts owed. This should encompass all debts, such as credit card statements, personal loans, and any mortgage or vehicle loan documents.
• Proof of income, including pay stubs for the six months prior to filing, W-2 forms from the last two years, and documentation for any other income sources.
• Documentation of monthly living expenses, such as utility bills, rent or mortgage payments, and food costs.
• Information regarding all assets, including bank account statements, investment accounts, real estate property deeds, and vehicle titles.
• Details on any significant financial transactions, such as large transfers or payments to creditors, made within a certain period before filing.

Steps in the Bankruptcy Process

The bankruptcy process follows defined steps once information is gathered.

Before filing, individuals must complete a mandatory credit counseling course. The formal process then begins with filing the bankruptcy petition and supporting schedules, outlining all financial affairs.

Upon filing, an automatic stay immediately prevents most creditors and collection agencies from pursuing actions against the debtor. This halts lawsuits, wage garnishments, foreclosures, and repossessions, providing immediate relief.

Within 20 to 40 days, debtors attend a “meeting of creditors” (341 meeting). Here, the bankruptcy trustee and creditors can ask questions under oath about the debtor’s financial situation and filed documents.

Before discharge, debtors must complete a second mandatory course, a debtor education or personal financial management course. This course, taken after the 341 meeting, focuses on financial management skills.

In Chapter 13 cases, the repayment plan must be confirmed by the court.

The final stage is the discharge order, releasing the debtor from personal liability for qualifying debts. For Chapter 7, this occurs within a few months; for Chapter 13, it happens after successful repayment plan completion.

Debts That Remain After Bankruptcy

While bankruptcy can discharge a wide range of debts, including medical bills, certain types of obligations are considered non-dischargeable and remain the individual’s responsibility.

• Most student loan debts, except in rare cases where an “undue hardship” can be proven.
• Certain tax debts, particularly recent income taxes or tax liens.
• Obligations related to domestic support, such as child support and alimony.
• Debts for personal injury or death caused by driving while intoxicated.
• Fines, penalties, and restitution orders owed to government agencies due to a criminal offense.
• Debts incurred through fraud or misrepresentation, if challenged by the creditor and proven in court.