How to File for Bankruptcy Due to Medical Debt

Medical debt can become an overwhelming burden, prompting many individuals to consider bankruptcy as a pathway to financial relief. While the term “medical bankruptcy” is frequently used, it does not represent a distinct type of bankruptcy filing. Instead, it refers to situations where medical expenses are a primary factor driving individuals to seek protection under existing federal bankruptcy laws. Bankruptcy provides a legal process for individuals facing unmanageable debt, offering a structured approach to address financial obligations and facilitate a fresh start.

Understanding Medical Debt and Bankruptcy Options

Medical debt is typically categorized as unsecured debt, similar to credit card balances or personal loans. This classification means it is not tied to specific collateral that a creditor can seize. Both primary types of individual bankruptcy, Chapter 7 and Chapter 13, can address medical debt.

Chapter 7 bankruptcy, often called liquidation bankruptcy, allows for the discharge of most unsecured debts, including medical bills, generally within a few months. Eligibility for Chapter 7 hinges on a “means test,” which evaluates an individual’s income and expenses. This test determines if their financial situation truly prevents them from repaying their debts. If an individual’s income falls below their state’s median income for a household of their size, they typically qualify. Chapter 7 is generally suitable for those with lower incomes and limited assets.

Alternatively, Chapter 13 bankruptcy involves a reorganization of debts through a court-approved repayment plan spanning three to five years. This option is available to individuals with a regular income who can afford to make consistent payments toward their debts. Debt limits apply to eligibility. Chapter 13 is often chosen by those who have higher incomes, possess significant assets they wish to protect, or have debts that are not dischargeable under Chapter 7. Any medical debt not fully repaid through the Chapter 13 plan is typically discharged upon successful completion of the plan.

Before filing for either Chapter 7 or Chapter 13, individuals are legally required to complete a credit counseling course from an agency approved by the U.S. Trustee Program. This mandatory session aims to explore alternatives to bankruptcy and assess whether a debt management plan could resolve the financial difficulties. A certificate of completion is issued, and it must be submitted with the bankruptcy petition. This certificate is typically valid for 180 days.

Preparing Your Bankruptcy Filing

Accurate and comprehensive financial disclosure is foundational to a successful bankruptcy filing. Individuals must meticulously gather all relevant financial information to complete the official federal bankruptcy forms, known as schedules. This process begins with collecting detailed records of all income sources, such as pay stubs, W-2 forms, and recent tax returns.

A thorough list of all debts is also necessary, specifying creditor names, account numbers, and the exact amounts owed. This includes all medical bills, alongside credit card statements and loan agreements. Beyond debts, a complete inventory of assets is required, encompassing real estate, vehicles, bank accounts, investments, and personal property like furniture, electronics, and valuables. Documentation such as deeds, vehicle titles, and bank statements should be compiled to verify asset ownership and account balances.

Additionally, individuals must document their monthly living expenses, which cover housing, utilities, food, transportation, and insurance. Information regarding any property transfers or payments made to creditors within a specific timeframe prior to filing should also be prepared. All of this gathered information populates standardized federal bankruptcy forms. The accuracy and completeness of these schedules are paramount, as they form the basis of the court’s understanding of the debtor’s financial situation.

The Bankruptcy Filing Process

Once all preparatory financial information has been meticulously gathered and the official bankruptcy forms, known as the petition and schedules, are completed, the formal legal process begins. The first procedural step involves filing these documents with the appropriate bankruptcy court. A filing fee is required at this stage, though individuals may apply to pay in installments or request a fee waiver if they meet specific financial criteria.

Immediately upon the filing of the bankruptcy petition, a legal injunction known as the automatic stay goes into effect. This protection automatically halts most collection activities against the debtor. Creditors are prohibited from continuing lawsuits, initiating foreclosures or repossessions, garnishing wages, or making collection calls. The automatic stay provides debtors with breathing room to navigate the bankruptcy process without ongoing harassment.

A mandatory step in the bankruptcy process is the Meeting of Creditors, also referred to as the 341 Meeting, named after the section of the Bankruptcy Code that mandates it. During the meeting, the debtor must appear and testify under oath regarding the accuracy of the information provided in their bankruptcy petition and schedules. While creditors are permitted to attend and ask questions, they rarely do; the trustee primarily reviews the debtor’s financial situation and confirms the submitted facts.

Following the filing of the petition and before a discharge can be granted, debtors are required to complete a second educational course, known as the debtor education course or financial management course. This course focuses on personal financial management and budgeting, aiming to equip debtors with tools for a more stable financial future.

Debt Discharge and Asset Protection

The primary goal for many individuals filing for bankruptcy is the discharge of their debts. A bankruptcy discharge is a court order that legally releases the debtor from personal liability for most of their debts. This means that once a debt is discharged, creditors are permanently prohibited from taking any further collection actions to recover the money owed. Medical bills, as unsecured debts, are typically fully dischargeable in bankruptcy.

However, not all debts can be discharged through bankruptcy. Certain categories of debt are generally considered non-dischargeable due to public policy reasons, and debtors remain responsible for these obligations even after bankruptcy. These commonly include:
Most student loan obligations, unless the debtor can prove an “undue hardship.”
Child support and alimony.
Certain types of tax debts.
Debts incurred through fraud or willful and malicious injury to another person or property.

A significant benefit of bankruptcy is the protection of certain assets through exemptions. Exemptions are legal provisions that allow debtors to keep specific property up to a certain value, preventing it from being liquidated to pay creditors. Common types of exemptions include:
A portion of equity in a primary residence (homestead exemption).
A vehicle.
Household goods.
Tools of the trade.
Retirement accounts.
Debtors generally have the option to choose between a set of federal exemptions or the exemption laws provided by their state, which can vary significantly.

The timeline for receiving a discharge varies depending on the type of bankruptcy filed. In a Chapter 7 case, the discharge typically occurs relatively quickly. For Chapter 13 cases, the discharge is granted upon the successful completion of all payments under the court-approved repayment plan, which can take between three and five years.