Does Bankruptcy Clear Medical Debt?
Unlike many other kinds of debt, medical debt can be unplanned and unexpected. It’s not like taking out a loan, where you have the opportunity to review the terms and decide if making the payments is feasible for you. Instead, one minute everything is fine, the next minute you’re hurt, and the next thing you know, someone at the hospital is asking for your insurance card. Patients often have no idea what their out-of-pocket costs will be until they get the bill, and it may not be top-of-mind to ask about costs during a medical emergency.
Another issue is that even health insurance won’t protect you from getting a large bill in some cases. For example, if you have a heart attack and need bypass surgery, it could cost more than $100,000. A “good” insurance policy might pay 80 percent of that, leaving you with a copay in the tens of thousands of dollars.
Clients often tell us that they never had any financial problems before their illness or injury left them in debt. It may be the first time in their life they’ve ever missed a payment, but they simply don’t have the money for the amount of medical debt they’re in. Unfortunately, this kind of situation can very quickly put a person’s finances in the red. Bankruptcy due to medical bills is quite common, with two-thirds of people who file for bankruptcy citing medical bills as a major factor. However, there are several possible solutions for dealing with medical debt, including two types of bankruptcy.
Does Bankruptcy Clear Medical Debt?
It depends on the type of bankruptcy and how much debt you have, but yes, in many cases, bankruptcy will clear most or all of your medical debt. There are two main options for individuals with large amounts of debt:
- Chapter 7 bankruptcy involves wiping out the filer’s debts, including medical bills. Any assets will be sold off and used to pay your creditors. Generally, you will be allowed to keep exempted essential assets like a house or car, but if you have debt on these (in other words, you don’t own them outright), you will need to agree to keep paying that specific debt to keep them.
- Chapter 13 bankruptcy is different because it doesn’t aim to eliminate all debt without any payment. Instead, debts are consolidated into one monthly payment, which the filer will continue to pay for over three to five years. This payment may be lower than the monthly sum of all previous individual debts, making it easier to continue paying. If the total amount of debt is so excessive that there is no way for the filer to pay it off in three to five years on their income, some of the debt may be erased. Typically the judge will decide how much debt the filer can realistically be expected to pay in that time period, then discharge the rest. With this type of bankruptcy, you get to keep all your assets, but you must continue making payments on them.
Does Bankruptcy Clear All Debt?
No. While it will probably clear all or most of your medical debt, it won’t cover certain other kinds of debt, like past due taxes or other government debts, student loan debts, restitution owed for a criminal offense, alimony or child support, or debts you were required to pay in a divorce decree. But sometimes, people get behind on these other kinds of debts because of sudden, large medical bills, so a medical bankruptcy may help make it easier to get caught up on them.
Additionally, medical debt is considered “unsecured debt,” like credit card bills, past due utility bills, and personal loans. Unsecured debt is usually wiped out in a Chapter 7 bankruptcy, so if you choose this option, you’ll clear any other unsecured debts with your medical debt.
How to File Medical Bankruptcy
No specific type of bankruptcy is just for medical debts, so you will choose from a Chapter 7 or Chapter 13 filing. As mentioned, your medical debts will be clustered with any other unsecured debts and discharged in a Chapter 7 filing, leaving you with any secured debts – student loans, reaffirmed debts (such as a car note you agreed to continue paying to keep your car), back taxes, child support, etc. Chapter 7 may be a good idea in certain situations:
- If you have few or no assets you’re worried about keeping.
- If your assets are exempt (necessary, like a house or car) and paid for.
- If you don’t also have an insurmountably large amount of non-dischargeable debt.
Chapter 13 may be a good option in other situations, such as:
- When you have significant non-exempt assets you want to keep.
- When you have a lot of non-dischargeable debt in addition to medical debt.
- When you still won’t be able to make the payments on the non-dischargeable debt after your medical and other unsecured debt is gone.
- When you have a higher income that may make Chapter 7 unsuitable for your situation.
You can file the paperwork independently, but it’s better to consult a bankruptcy attorney. They can ask questions about your circumstances and explain key issues for your financial future so you will be fully informed. Your lawyer will also ensure all the necessary forms are filled out and filed correctly to prevent your case from getting hung up on a clerical error.
Is Bankruptcy the Only Option for Clearing Medical Debt?
Not necessarily. Depending on the amount of medical debt, your income, and other debts, it may be worth trying to negotiate with creditors for lower monthly payments. In a few cases, creditors may agree to reduce your bill in exchange for getting paid more quickly. The negotiation process can be complicated and many people have no idea how to start, but a skilled financial attorney may be able to get you lowered payments that you can make regularly.
New Mexico Financial and Family Law: Consult a Bankruptcy Attorney Today
Mounting medical debt can be very stressful, but once you’ve learned your options, you’ll have clear choices about moving forward. A bankruptcy attorney will answer your questions, then assist you with filing for bankruptcy or negotiating with creditors once you’ve made a decision. Please contact us at New Mexico Financial and Family Law for a free consultation today at (505) 503-1637.