What You Need to Know About Bankruptcy and Medical Bills

Bankruptcy and Medical Bills

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Medical bills are a common cause of bankruptcy. If you are like many other Americans, a sudden illness or accident may have put you in a significant amount of medical debt. Bankruptcy due to medical bills is a lifeline for many Americans. Depending on your situation, it can give you the fresh start that you and your family need.

This article will help you understand more about Chapter 7 bankruptcy and the ways it can impact your medical bills.

First, know what kind of debt medical bills fall under.

Medical bills in bankruptcy are a different kind of debt than mortgages or car loans – they’re not “secured” by any property. So, medical bills are considered “unsecured” debts. Additionally, medical bills in bankruptcy are considered “nonpriority.” In Chapter 7 bankruptcy, priority debts are the first to be repaid to creditors, and nonpriority debts are the last.

So what does this mean? In Chapter 7 bankruptcy, unsecured, nonpriority debts are discharged, without need for repayment. You can use bankruptcy for medical bills to relieve the huge burden that medical debt brings. Also, don’t worry if you paid for your medical bills with a credit card. Credit card debt is another type of unsecured, nonpriority debt that can be easily wiped in Chapter 7.

Even though all debts are not treated the same, you can’t pick and choose which ones to discharge. There is no such thing as a “medical bills bankruptcy.” When you file, you must list all your debts, along with other information. On the other hand, if your debt is solely medical bills, you are more than welcome to file and just get those discharged.

Now, make sure you’re eligible for to use bankruptcy for medical bills.

Before you race to the nearest courthouse to file the paperwork, make sure that you will be eligible to use bankruptcy for your medical bills. While there is no limit or cap on how much medical debt you can discharge in Chapter 7 bankruptcy, you must pass the “means test.” The means test determines if your income is low enough to be eligible – otherwise, you might have to pursue other options, like Chapter 13.

With Chapter 13, there is a repayment plan. However, because medical bills in bankruptcy (and credit card debt) is unsecured, most people will end up paying back only a fraction of the debt. Chapter 13 doesn’t damage your credit as much as Chapter 7, and its eligibility requirements are a little different.

Additionally, whether you have health insurance is irrelevant. Your case is not more or less valid with or without it. Your eligibility relies on your total debt, disposable income, and assets.

Even if you are eligible – decide if you should use bankruptcy for medical bills now, or later.

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Waiting to file for bankruptcy for medical bills might seem like the last thing you want to do. Especially with medical bills piling up with no end in sight, the stress can be overwhelming. However, if you use bankruptcy for medical bills, you want to do it right.

Once you file for bankruptcy, any debt incurred after will not be discharged. When you use bankruptcy for medical bills, you’re including the existing medical debt (and all other debt) for consideration for discharge.

While you can technically file for bankruptcy multiple times, there are limitations. If you’ve received a discharge under Chapter 7, you can’t file a second Chapter 7 case until eight years have passed! Bankruptcy stays on your record for 10 years, so timing is an important consideration.

So, if you’re set to incur additional debt, you may want to wait and prepare accordingly. Additionally, if all of your assets are “exempt,” which means they’re protected from creditors, you may want to wait to file as well. Other considerations include your level of income, the likelihood of wage garnishment, and your prospective insurance coverage.

Think about if the hit to your credit is worth it.

Bankruptcy for medical bills has its ups and downs – one of the tradeoffs for discharging your debts is the hit to your credit. If you have good credit, using bankruptcy for medical bills will definitely lower it. But the damage is not permanent.

And, if you’re thinking about bankruptcy for medical bills, it’s likely that your credit will suffer other ways anyway. If you can’t pay your hospital or medical bill, you’ll get late-payment notices. Sometimes, the provider may even sue you and get a judgment to collect what you owe them. This could mean wage garnishments or other collection actions.

So, if you’re worried about bankruptcy hurting your credit, think about what would happen to it if you didn’t file. Can you work out ways to pay the provider, even in installments? Make sure to answer this question honestly before using bankruptcy for medical bills.

Decide if Chapter 7 or Chapter 13 is more appropriate for your needs.

Deciding between the two types can be hard. Like we mentioned above, the eligibility requirements for Chapter 7 and Chapter 13 are a little different. For example, unlike Chapter 7, there is a debt limit for Chapter 13. If your medical bills and other debts exceed the Chapter 13 limits, you may not be eligible to file at all. If you are eligible, the medical bills are lumped in with other general, unsecured debts in a repayment plan. The amount you must pay the creditors for these debts depends on your income, expenses, and nonexempt assets.

So, if you don’t earn a lot of money and have assets with little or no equity, you may want to consider Chapter 7 instead. Chapter 7 bankruptcy is the most common type of bankruptcy that individuals file. There is also no limit to the amount of medical bills in bankruptcy that you can discharge.

If you are interested in filing for Chapter 7 bankruptcy, consider Upsolve, a non-profit whose mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. Find out here if you qualify.

And of course, don’t do anything that would harm your case.

Bankruptcy for medical bills is an incredibly helpful and valid way to relieve your debt burdens. However, the law technically does not allow anyone to incur a debt when they don’t intend to pay it. This would be considered fraud. But don’t worry. Most medical creditors don’t raise objections based on fraud.

Whether it’s an accident, unexpected diagnosis, or something more gradual, there is a great defense for making sure you’re in good health. However, just know that luxury procedures or non-justifiable treatments could put your case at risk.

Committing fraud before or during bankruptcy for medical bills can result in severe consequences, including fines and criminal charges. Not to mention, your discharges will be denied. Keeping this in mind and as long as you remain transparent, you should be confident in your case.

If you're filing for Chapter 13 and not Chapter 7, there are other reasons why that case may be dismissed.

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We understand that debt is the last thing you want to think of after a catastrophic event or illness in the family. Your health is incredibly important, and bankruptcy can allow you to get a fresh start. Bankruptcy for medical bills is extremely common, and is also feasible to do on your own.

See if you qualify for Upsolve, a non-profit that helps low-income Americans erase their medical and credit card debt with Chapter 7 bankruptcy at no cost. With their help, you can be free of debt and focus on giving your family and yourself the happy, healthy life you need.

Upsolve is a 501(c)(3) legal aid nonprofit that started in 2016. Our mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. We do this by combining the power of technology with pro bono attorneys. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have mission-driven funders that include the U.S. government, former Google CEO Eric Schmidt, and private charities.

To learn more, read our reviews from past clients, or read our press coverage.