This article will explain what bankruptcy is and what type of bankruptcy may be beneficial to you, how your medical debt is affected by bankruptcy, and how you can get started on your journey to discharging your debt and obtaining a fresh start.
Written by Attorney Jamie Lee Ruiz.
Updated July 22, 2020
Typically, the road to file bankruptcy is full of twists and turns and making the decision to file is not the easiest. Although the reason for filing Chapter 7 or Chapter 13 bankruptcy may be different for each person, most arrive at the decision due to the overwhelming burden of credit card and medical bills - both of which are unsecured debts. Medical debts can result from one emergency room visit or series of treatments from a serious illness that are not covered by health insurance. This article will explain what bankruptcy is and what type of bankruptcy may be beneficial to you, how your medical debt is affected by bankruptcy, and how you can get started on your journey to discharging your debt and obtaining a fresh start.
What relief is available to me through bankruptcy?
There are two types of bankruptcy available to consumers (a.k.a personal bankruptcy). The first type of bankruptcy is Chapter 7 bankruptcy. Most Chapter 7 bankruptcy candidates are low income, and typically their monthly expenses and debt payments exceed their income. A Chapter 7 candidate typically has mostly unsecured debts, such as medical debts and credit card debts, and typically no significant assets. Chapter 13 bankruptcy is designated for those who have enough disposable income to pay back some of their debts.
Chapter 13 bankruptcy candidates will propose a Chapter 13 plan and make payments to the Chapter 13 trustee over a period of 3 to 5 years. Their payments will be distributed amongst their creditors in order of priority, with unsecured creditors being the last in priority. For example, payments would be distributed first to outstanding debt associated with real estate and last to healthcare costs associated with your medical care (more about medical debt below). Unfortunately, student loans are non-dischargeable through bankruptcy (absent few exceptions) even though they are considered unsecured debts. The key difference between Chapter 7 and Chapter 13 bankruptcy filers is that Chapter 7 candidates will have most, if not all of their debts discharged, where Chapter 13 candidates will pay back some of their debts before receiving a discharge.
What type of debt is medical debt?
When filing for bankruptcy, Chapter 7 or Chapter 13, your debts are categorized. There are secured debts, which are debts that are backed by collateral. The most common secured debt is a mortgage or a car loan. There are also priority debts. These debts receive special treatment because they are often government or court-ordered obligations such as taxes, child support (i.e. possibly associated with a garnishment), and alimony. The third type of debt is unsecured debt. Unsecured debt consists of medical care costs a.k.a medical debt, credit cards, personal loans, and utility bills.
Is medical debt dischargeable through bankruptcy?
The short answer is YES. In a Chapter 7 context, medical debt, regardless of the amount, is completely dischargeable. That means, if your bankruptcy results in a discharge, you have no obligation to pay back any of the medical bills you have incurred that were not paid for by your insurance coverage before filing in your bankruptcy petition. In a Chapter 13 context, your medical debt will be lumped in with the rest of your unsecured debt and your creditors will receive a pro rata portion of your payments in your Chapter 13 plan.
How do I get started?
The good news is you can file Chapter 7 or Chapter 13 bankruptcy by yourself, for little to no cost. Filing for bankruptcy, contrary to popular belief, is not just filling out a couple of forms and listing all your medical bills and unsecured debts. You will need to be organized, precise, and patient. Before you get started, you will need to know if you qualify for bankruptcy. It is helpful to take the means test to determine if you meet the income and expense requirements or if you fall within any of the exceptions. Another helpful preparation tip is to examine the state and federal exemptions to determine what property you can keep even after filing bankruptcy.
Once you determine that bankruptcy is the right move for you, you should gather the following financial documents: your bank statements, income tax returns, pay stubs, and monthly bills. You will need all the above financial information to fill out the bankruptcy forms and file them with the Court. When you have prepared for filling out the forms, you can access all the forms you need for free on the court’s website. Prior to filing your forms with the court, you will need to take a credit counseling course. This course will outline the options you have for dealing with your debt, including bankruptcy.
If you decide that you would like some help filing your bankruptcy, you may need some professional help. Consider consulting a bankruptcy attorney. The cost for a bankruptcy lawyer can vary but is typically a one-time fee averaging approximately $1,500. They will ask for a copy of your credit report to find out your credit score, your total debt, type of debt (i.e. amount of medical debt), etc. The bankruptcy attorney will then inform you on the options you have for dealing with your debt, fill out your bankruptcy forms and file them with the court, and see you through to discharge.
Making the leap to securing a sound financial future can be scary. But, what can be even scarier, is being stuck in a financial rut when there is another way. Medical debts and credit card debts are the most common debts plaguing everyday people. You do not have to be stuck with these bills forever and can obtain debt relief through the bankruptcy process. By using Upsolve, you can arm yourself with the knowledge you need to file for Chapter 7 for free, discharging your unsecured debts and paving the way for good credit and no debt.