Will Medical Debt Be Forgiven in Bankruptcy?

Having excellent health is what many people hope to experience in their lives. Apart from affording opportunities to pursue a career, leisure activities, and quality time spent with family and friends, good health often means lower medical expenses. This financial connection is so clear to most that the term “health is wealth” is commonly understood. Unfortunately, a recent study shows that 23 million Americans have medical debt, with 11 million owing more than $2,000. 

Medical debt can be devastating to a person’s finances, and it can seem as though there is no end to it when a surgery or major illness or injury is involved. The good news is there are a couple of ways to get out from under the burden of medical debt. In this article, we’ll explore them further.

What Is Medical Debt? 

Medical debt is a phrase that describes people going into debt over medical expenses. The Consumer Financial Protection Bureau confirms that most third-party debt collections are made up of medical bills. The people most affected by unpaid medical bills are people with disabilities or poor people; because of this, minorities are more susceptible to medical debt. 

There isn’t a bankruptcy that is specific to medical debt. A person can’t just file for bankruptcy because they have burdensome medical bills. However, medical debt is forgivable and considered unsecured debt, which has no collateral backing. Unlike secured debt, unsecured debt isn’t attached to an item (or items) that can be seized. 

Medical and other debts – such as credit card debt, car debt, overdue bills, and personal loans – will be included when filing for bankruptcy. So even if medical bills are the biggest reason for filing, it’s important to look at all debts to decide the best approach to filing. Being that medical debt is considered unsecured debt, it is more likely to be wiped clean during bankruptcy proceedings. 

If someone only has medical debt, it may be best to look into alternative options to resolve that debt before seeking out bankruptcy filings – unless the medical debt is so substantial that it is significantly affecting one’s life. 

Alternative Options for Paying Medical Debt

  • Negotiate: Talking to people can work wonders sometimes when a creditor calls. Answer the phone and see if a settlement can be reached. But, be prepared. Don’t speak with them until fully prepared to negotiate and have all information ready. It’s generally not advisable to speak with a creditor or provide them with any information prior to this. When set to negotiate, it’s good to consult an attorney because they have more experience in handling such matters. Surprisingly, sometimes medical providers will waive or discount some bills. However, a lot of patients are unfairly treated when it comes to medical pricing. There are many hidden fees and billing mistakes, and hospitals charge different prices for the same procedures based on the patient’s insurance. Therefore, consider hiring a good negotiator because that is the best chance a person has of getting a reduced medical bill. 
  • Seek out programs: Hospitals will have financial assistance programs for people who qualify. Depending on a person’s income, they can qualify for free or reduced care. There are also nonprofit hospitals that help people in need.   Although nonprofit hospitals are a good option, they have their challenges. Accountability of these institutions only sometimes happens, and the people pay for it. The institutions may fail to inform people of their eligibility for care. In some cases, people are forced to pay upfront fees at these charitable hospitals. Recent studies have shown that 45% of these hospitals charge people who qualify for their charity services. If seeking out these programs, do some research on the hospital beforehand. 
  • Debt management plan: Before the bills get too scary to handle, see if a credit counseling agency can help; there are nonprofit credit companies that help come up with a plan to repay medical debt. Going this route may allow a person to have more extended repayment plans with lower interest rates and free from fees. 

Being diligent when choosing this route. Doing as much research as possible is important because it can cause more problems if not handled properly. Some of these plans will have costly fees. They also may close out credit cards and restrict access to other lines of credit. One of the biggest problems is that these plans cannot guarantee the creditors will agree to the debt settlement. 

The Better Business Bureau is a good starting point for vetting these companies. However, do not exclude an attorney from this conversation. Speaking with an attorney may open up more options than a debt management agency. 

Wipe Out the Debt Through Bankruptcy

Two types of bankruptcy can cover medical debt: Chapter 7 and Chapter 13. Each covers debt differently, so it is important to understand one’s current and future needs before filing. If someone is considering filing for bankruptcy, it’s best to consult with an experienced bankruptcy attorney if looking to address medical debt.

Chapter 7 Bankruptcy 

This type of bankruptcy is used to help people who have no viable means of paying back their current debts. The courts will look at many things to determine how to offset the person’s debt. They will look into the amount a person owes, the income earned, and assets that can be sold to help pay back the debt. Chapter 7 will wipe out many different debts, including medical.

Another benefit of Chapter 7 is that a person’s case can be addressed relatively quickly, concluding in around three to four months. There is no repayment plan needed for this type of bankruptcy. Once the proceedings are complete, the qualified debts will no longer be owed, and the person who filed can begin rebuilding their finances.

If considering Chapter 7 bankruptcy, there are some things to know. For starters, not everyone will be able to qualify. Anyone seeking to file Chapter 7 bankruptcy must first pass a means test. This test will compare a person’s average monthly income for the six months before the person files for bankruptcy against the median income for the state in which they reside. The living expenses and standard of living within the state are factors in the means test. This comparison will provide a rough estimate of the person’s disposable income for potentially paying back creditors, such as doctors and medical facilities. 

If a person applying for Chapter 7 doesn’t meet the median income for their state and is considered low income, they will likely pass the “means test” requirement for this form of bankruptcy. However, even a person who earns more than the median income within their respective state may still be able to file Chapter 7, but they will need to complete all the steps of the means test to determine if they are eligible.  That next step would be the chapter 7 means test calculation, also called Form 122A-2. After deducting the allowed expenses, which usually include the bills, people must pay to live. Then the accurate, disposable income is seen by the court; if this amount is high, they won’t be able to file for chapter 7. 

Another aspect people should consider is the loss of their possessions. Property and cars could be seized to offset a person’s medical debt, especially unnecessary items such as boats or RVs. On the other hand, basic needs, such as a reliable car to travel back and forth to work, are likely to be considered necessary during bankruptcy proceedings. 

Filing under this chapter can help people keep the necessary property because chapter 7 will eliminate unsecured debt. When this happens, it frees up money for people to use on vital items such as homes and cars. However, if a person cannot maintain home mortgage payments or car loans after some of their debt has been alleviated, those properties can still be taken to continue to pay off debt. 

Lastly, credit score is a consideration, although, at this point, it may not be a concern. A Chapter 7 bankruptcy will be on a person’s credit history for ten years, potentially impacting a person’s ability to get loans in the future. However, credit goes up much faster after bankruptcy is filed and debts are no longer owed. Once a person files for bankruptcy, they will have to wait years to file again. The number of years will depend on the previous chapter filed and the current chapter they want to file. 

Bottom line, Chapter 7 is a good option for people who don’t have enough resources to make a repayment plan that would adequately cover their debts over time. 

Chapter 13 Bankruptcy

This plan is commonly known as the “reorganization plan.” This is a good option for people with more income available to repay medical debts. It’s also good for people with more at stake to lose. While Chapter 7 can be seen as a quick fix, Chapter 13 will help people come up with a three- to five-year plan to repay all or some of their debt.

To qualify for Chapter 13, a person can’t exceed the established debt limits:

  • A person’s unsecured debts can’t exceed $465,275. 
  • A person’s secured debts can’t exceed $1,395,875.

In a chapter 13 filing, a person could keep their cars and homes even if they used them as collateral. This is because this form of bankruptcy will give the person a chance to catch up on payments over a span of time. A person also will have the flexibility to prioritize their debt. 

If keeping possessions and property are more of a concern, chapter 13 is a better option. People who file this type of bankruptcy can use their disposable income to pay back the debt over a longer period. The good news is that any remaining eligible balances can be wiped out, which includes medical debt. 

How Rosenblum Law Can Help

Using bankruptcy to rid yourself of mounting medical debt can be a daunting process. You shouldn’t think about doing it all alone. If you’re struggling to pay bills and want to see if filing for bankruptcy is an option, the attorneys at Rosenblum Law are more than capable of assessing your situation and handling your case if it proceeds. We have the knowledge, experience, and concern to be with you every step of the way until your debt obligations are resolved. Call us today for free consultation. 

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