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Medical Bankruptcy: How is Medical Debt Handled when Filing Bankruptcy?

An extremely common reason a debtor considers filing bankruptcy is to discharge overwhelming medical debt, often referred to as a medical bankruptcy. Generally, a debtor can discharge most medical debt when filing for a Chapter 7 or Chapter 13 bankruptcy, however there are many factors to consider when contemplating filing a bankruptcy. A debtor must also keep in mind, you should not limit a bankruptcy solely to medical bills. Generally, medical debt is considered non-priority unsecured debt, and therefore, it is dischargeable. Unsecured debt is debt that is not tied to or attached to property or assets owned by the debtor. 

When deciding if filing bankruptcy is right for you there are many factors a debtor must consider. One of the first factors a debtor must consider is whether their illness has been resolved or whether or not they may face another financial crisis from their illness. A debtor is only entitled to receive so many discharges in a span of time. If you are considering a Chapter 7 discharge you must wait eight years until you are eligible to file another Chapter 7 bankruptcy. If a debtor’s illness is not resolved and they incur more overwhelming medical debt, after the initial discharge, the debtor does not have the safety of a discharge or automatic stay granted by a bankruptcy. 

A debtor should consider if they have additional debt they can discharge within the bankruptcy or if an alternate route is better for their circumstances. A turning point for many debtors pushing them in the direction of filing bankruptcy is whether or not they have other dischargeable debts. Other dischargeable debts include unsecured debts, such as: credit card debt, utility bills/balances, back rent or lease payments, memberships, personal and payday loans, mortgage, auto loans, and other secured debt. However, with certain secured debts, the debtor will have to return the property securing the debt. The debtor must be aware of non-dischargeable debts such as, but not limited to: domestic obligation, tax debts, and student loan debts, that cannot be included in any bankruptcy unless there is an exception. Debts that can be discharged in a Chapter 7 bankruptcy may also be discharged in a Chapter 13. Filing bankruptcy solely for a medical discharge is allowed, however, if the debtor has good credit there may be non-bankruptcy options available. A debtor may be able to negotiate a settlement with their medical advisor or enter into an assistance program to avoid the long-term effects of filing for bankruptcy.

Filing a Chapter 7 Bankruptcy for Medical Debt:

Filing a Chapter 7 Bankruptcy provides a debtor with a near immediate relief for all dischargeable debts, which includes medical debts. Chapter 7 does not provide a limit on the amount of medical debts a debtor may discharge. To file a Chapter 7, a debtor must first be eligible by passing the means test. The means test looks at the debtor’s average income for the past six months, family size, and monthly expenses and compares them to the median income for your state. If a debtor ultimately passes the means test, the debtor may go through the process of filing a Chapter 7 and receive their discharge. Generally the process takes four to six months. 

Filing a Chapter 13 Bankruptcy solely for Medical Debt:

Depending upon the debtor’s situation, some hidden benefits may exist when filing a Chapter 13 that do not normally exist when filing in a Chapter 7.  One example is the ability to catch up with arrearages a debtor may have on their secured debt over a longer period of time, or protecting property that is due to foreclose.  Filing a Chapter 13 when you have an overwhelming amount of medical debt is possible but not always practical.

A consumer debtor typically has a choice which chapter they want to file, but in some cases it is not possible to choose especially when they do not qualify for a Chapter 7 due to a higher income that above the state’s median.  Although filing a Chapter 13 is not as easy or quick as filing a Chapter 7 bankruptcy, the benefits could outweigh the requirements one must have in order to file a Chapter 13 and receive a discharge.  For example, the debtor is required to prove that they have the monthly income to pay back a portion of their debts in a three-to-five-year period and that their debt does not exceed the $419,275 unsecured debt limit.  If a debtor sticks to the repayment plan, any debt left over at the end of the time period will be discharged including the medical debt with which you started out.

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