Medical Bankruptcies: How to Get Rid of Medical Debt

Yes, you can wipe out or "discharge" medical debt in bankruptcy. In fact, many people who can't pay medical bills on their own get rid of them by filing for bankruptcy. But both Chapters 7 and 13 have qualification requirements. Here are a few things you'll want to consider:

• Is your income low enough for you to qualify for Chapter 7 bankruptcy?
• If you qualify for Chapter 7, would you lose property? Could you erase other debt?
• Would Chapter 13 be a better option and how much would your Chapter 13 payment be each month?
• Is the timing right, or do you expect to incur more medical bills?

You're probably getting the idea that while you can discharge medical debts, you'll need to know how Chapters 7 and 13 work before you'll be able to decide whether filing for bankruptcy will be a good idea. Answering the questions in the "Medical Debt Bankruptcy Shortcut" at the end of the article will help.

You Can File Bankruptcy on Medical Bills

It's indisputable that bankruptcy solves medical debt problems. But you can't file exclusively on medical debt and leave other bills out of the case. You must report everything you owe when filing for bankruptcy.

However, this shouldn't pose a problem. If you're like most, you'll want to erase other debt and come as close to getting a clean financial slate as possible.

Do You Have Debts Other Than Medical Bills You Can Erase in Bankruptcy?

It's perfectly fine to file for bankruptcy when all you have is medical debt. But knowing that you'll include everything you owe, and it's possible that you'll get rid of other bills could help tip the balance in favor of bankruptcy.

Here are examples of "dischargeable debts," or debts that will qualify for a discharge:

• credit card debt
• medical bills
• utility balances
• back rent or lease payments
• gym and other memberships
• personal and payday loans, and
• mortgages, auto loans, and other secured debt (but you'll have to return the property securing the debt to the lender).

However, you can't erase every bill and obligation in bankruptcy. For instance, you'll remain responsible for nondischargeable debts, like domestic support obligations, recent income tax debt, and student loans (unless you qualify for an exception).

You can eliminate all of the same debts in Chapter 13 as in Chapter 7, but Chapter 13 lets you discharge a few more obligations. And it offers benefits not available in Chapter 7. We explain the differences between Chapters 7 and 13 further below.

Is it the Right Time to File a Medical Debt Bankruptcy?

The idea of wiping out thousands of dollars in bankruptcy can be compelling. However, it might not be the right time.

The timing matters because you can only receive so many discharges within a certain period. For instance, after receiving a Chapter 7 discharge, you must wait eight years before receiving another.

Here's the potential problem.

Suppose you incur more medical bills after your first bankruptcy or some other expensive calamity occurs. You'd be at the mercy of debt collectors until you paid off the obligation or qualified for another discharge.

So before deciding to file, consider asking yourself two questions: "Has my medical condition stabilized? What's the likelihood that another financial crisis will arise?"

Find out how often you can wipe out debt in bankruptcy.

Alternative Options for Getting Rid of Medical Debt

Not everyone needs to file for bankruptcy, and you might be one of those people.

Are you judgment proof? Some people don't have income or property that a collector could reach, and there's no need to file for bankruptcy—they're "judgment proof." Seniors with protected income, such as Social Security benefits and minimal assets, are often permanently judgment proof. But be sure to ensure you can protect all of your property from creditors using exemptions.

If your financial situation is temporary, calculate whether you can wait out the statute of limitations—the amount of time a creditor has to go to court and get a money judgment against you. Once it expires, the creditor can't force you to pay the bill. However, the debt will impact your credit report for a significantly longer time.

Can you apply for medical payment assistance? Many hospitals understand that it can be hard to pay outstanding balances and offer assistance programs for low-income people. You might even get the debt waived entirely. If this solution works, you'll be able to keep your bankruptcy discharge in your back pocket just in case you suffered another financial downturn.

If your medical condition has resolved and one of the two alternate solutions won't work, it's time to consider filing for bankruptcy.

Will Chapter 7 or 13 Be the Better Choice When Filing Bankruptcy on Medical Bills?

In many instances, bankruptcy is the best option. You can eliminate medical debt in Chapters 7 and 13, but the two chapters work very differently. The type of bankruptcy you'll choose will depend on three things:

• the amount of money you make and your qualification status
• whether you can discharge all of your debts, and
• if you're willing to lose property or would rather pay to keep it.

Below you'll learn more about what you'll want to consider when facing a Chapter 7 vs. Chapter 13 bankruptcy dilema.

What Happens to Medical Bills When Filing for Chapter 7 Bankruptcy?

Most people prefer to file for Chapter 7, but it doesn't solve every problem. Here are some of the pros and cons of a Chapter 7 filing.

Pros of Clearing Medical Debt in Chapter 7 Bankruptcy

• It's quick. Most Chapter 7 cases are over in four months.
• It wipes out more than medical debt. You can get rid of an unlimited amount of medical bills, credit card debt, personal loans, past-due utility and rent payments, and even mortgage and car payments (but you'll have to give the home or vehicle back to the lender).
• You don't pay creditors. Unlike Chapter 13, you won't pay into a repayment plan before receiving your discharge.

Cons of Clearing Medical Debt in Chapter 7 Bankruptcy

• You must qualify. A filer's disposable earnings must be low enough to pass the Chapter 7 means test so Chapter 7 works well for people without much income. But higher-income earners who are behind on their mortgage, car payment, tax, or support payments can qualify. Some active military personnel and people with primarily business debts don't even need to pass the means test.
• You might have debts to pay afterward. Chapter 7 doesn't erase all debts. After your case ends, you'll still have to pay bills that don't qualify for a discharge or "nondischargeable" debts like support arrearages, recent tax debt, and student loans.
• You could lose "luxury" property. You can protect the basics you'll need to work and live using your state's "bankruptcy exemptions." However, you'll lose luxury goods and other nonessential or "nonexempt" property. For instance, you'd likely lose a recreational boat, high-end watch, second vehicle, and vacation home or timeshare in Chapter 7.
• You could lose your home, car, or other collateral. If you secured a debt by pledging the property purchased on credit as security, and you're behind on the payment, Chapter 7 might not be for you because the property would be at risk. Why? Because Chapter 7 doesn't provide a way to catch up on payments if you don't pay as agreed. A collateralized or "secured" creditor would use the lien you gave against the property to recover it.
• Your credit score will suffer. Chapter 7 will stay on your credit report for ten years, but its impact would lessen with time.

Find out about the steps you'll take in Chapter 7 bankruptcy.

What Happens to Medical Debt in Chapter 13 Bankruptcy?

You can wipe out medical debt in Chapter 13, but you'll probably pay back some portion through a three- to five-year Chapter 13 repayment plan. Here are the basics.

Pros of Using Chapter 13 for a Medical Debt Bankruptcy

• You can save your home or car when the payments aren't current. The Chapter 13 repayment plan lets you keep your house, vehicle, or other property you've used as collateral for a loan by catching up on missed payments over time.
• You can force collectors into a payment plan. If you need time to pay off a "priority" obligation you can't wipe out in Chapter 7, like support arrearages or tax debt, filing for Chapter 13 will allow you to catch up over time.
• You won't lose property. If you own something you'd lose in Chapter 7, you can pay to keep it in Chapter 13.
• Your money will go toward what you care about most. Chapter 13 payment plans let you catch up on a mortgage or car payment and pay off most nondischargeable debts before paying other obligations. Medical bills and credit card balances must share whatever remains, which usually isn't much.
• Sometimes you can reduce home and car payments. If you owe more than the secured property is worth, you might be able to pay less if you meet other requirements. Learn about lien avoidance and "cramdowns."

Cons of Using Chapter 13 for a Medical Debt Bankruptcy

• You might have too much debt. Your medical bills and other debts can't exceed the Chapter 13 debt limits. If they do, you'll be limited to filing an individual Chapter 11.
• Chapter 13 is always expensive. You'll pay Chapter 13 creditors your disposable income for three to five years. Very few filers have much left over after paying a plan payment and monthly bills. Find out more in "Calculating a Chapter 13 Plan" below.
• Many people don't make enough to qualify. Your income must be sufficient to cover the amounts you must pay through the plan. Otherwise, the bankruptcy court won't approve or "confirm" your plan. If you'd like to see what you'd pay, try out the Chapter 13 payment plan calculator.

Calculating a Chapter 13 Plan

You'll start by separating your debts into priority and nonpriority unsecured debt. Debts such as domestic support obligations and recent overdue taxes receive special priority treatment and must be repaid in full. You'll also need to pay any mortgage, auto loan, or other secured debt arrearages if you want to keep the property.

Most other debts, including medical bills and credit card balances, don't receive priority treatment. They're all lumped into one "general unsecured" debt category. Each creditor gets a pro-rata portion of the remaining amount after higher priority debts are paid.

Some people won't have any money remaining and will have what's known as a "zero percent" plan, which is fine in many courts. Others will have enough to pay creditors in full, and most debtors fall somewhere between. The amount you'll have available to pay will depend on your income, expenses, and nonexempt assets. The court will discharge the balance of qualifying debts when you complete the plan.

Learn about the benefits available only in Chapter 13.

Medical Debt Bankruptcy Shortcut

We've given you quite a bit to consider. Here are the questions you'll want to answer before filing a medical bankruptcy.

1. Has your illness resolved, or could you face another financial crisis?
2. Can the medical provider collect from you?
3. Have you applied for payment assistance?
4. Do you have other debt you can wipe out in bankruptcy?
5. Is your income low enough to wipe out medical bills quickly in Chapter 7?
6. Are you a higher income earner who would like to wipe out medical debt while catching up on mortgage, car, tax, or domestic support obligation arrearages in Chapter 13?

More Information

You can learn more about your options by reading about Chapter 7 and Chapter 13 Bankruptcy or consulting with a bankruptcy attorney.