Medical Debt and Bankruptcy

In the United States, one of the top causes of personal bankruptcy is medical debt. The healthcare industry is responsible for more collections of debt than credit card companies.

This is because medical expenses can reach into tens to hundreds of thousands of dollars depending on the procedure. In some cases, medical bills also include out-of-network expenses — such as assisting doctors — for which the patient isn’t prepared. The end result of this type of practice is nationwide medical debt.

With the rising cost of healthcare and the lack of insurance coverage by many Americans, many people are turning to bankruptcy lawyers to inquire whether or not medical debts are dischargeable.

Can Bankruptcy Get Rid of Medical Debts?

Medical bills, hospital bills, and other medical-related debts can be eliminated through bankruptcy. Here’s how the different bankruptcy chapter handle medical debts:

In a Chapter 7 bankruptcy, medical debts are dischargeable. Even if some of the debt is paid during the bankruptcy process, the remainder will most likely be discharged as part of the bankruptcy. This makes Chapter 7 a popular option to get these debts under control and achieve financial relief.
In a Chapter 13 bankruptcy, the medical debt can be included as part of the repayment plan. The amount of the repayment plan would still be determined based on income, expenses, and nonexempt assets. However, if medical debts exceed the allowable limit under Chapter 13 bankruptcy, the individual may not be able to file.

How Bankruptcy Treats Medical Debt

Here’s what you need to know about how medical debts are viewed under bankruptcy law:

Medical debts are considered “unsecured” debts. Medical debts are considered unsecured debts because they are not backed by a person’s physical property. With secured debts, failure to make a payment can result in the person’s property being repossessed because the creditor has a lien on the property. This is usually the case with vehicle loans or home mortgages, but medical debts would not fall under that category.
Medical debts are considered nonpriority debts. Priority debts — such as certain taxes or domestic support obligations — are not dischargeable in a Chapter 7 bankruptcy. They are paid prior to other debts during the bankruptcy process. On the other hand, nonpriority unsecured debts, like medical bills or credit card debt, do not receive special treatment and are usually the last ones to be paid. They are usually discharged during the Chapter 7 bankruptcy without any need for repayment.

Should I Use Bankruptcy to Get Rid of Medical Debts?

While filing for bankruptcy can be an effective way to eliminate medical bills for many people, debtors should consider several factors before deciding to file. Sometimes the timing may not be ideal or you may benefit from another option.

Do you anticipate more debts soon? If your financial crisis is not yet over and you expect more debts, you may want to wait until these debts accumulate so they are covered during your bankruptcy case. Otherwise, you may be on the hook for these once your bankruptcy is over.
Has your illness been resolved? If you still require treatment for your illness, it might be a better idea to wait until you complete your treatments before proceeding with bankruptcy.
Do you qualify for payment assistance? Hospitals are willing to work with patients who are financially strapped. You may qualify for assistance programs, or even negotiating with the hospital can reduce your bill.
Are you judgment proof? Individuals are considered judgment proof when they do not have income or property that creditors can collect. Seniors living on protected income such as Social Security with low assets are an example. If you are classified as judgment proof, you may not even need to file for bankruptcy at all.

Filing for bankruptcy is a big decision and should not be taken lightly. Always seek legal advice from a bankruptcy lawyer to help you determine whether bankruptcy is the right choice for you, or if the timing is right.

Discuss Your Situation with an Attorney

It is important to have skilled attorneys on your side during bankruptcy. Our Southern California bankruptcy lawyers at Wadhwani & Shanfeld can help you determine the best option for your specific situation. We have handled more than 10,000 bankruptcy filings, giving us the experience and knowledge necessary to help you get through this difficult time.

Ready to discuss your bankruptcy needs? Give us a call today.