What You Need to Know Before Filing a Medical Bankruptcy

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If you are swimming in unpaid medical bills and feeling like you’ll never be able to pay them off, you’re not alone. In fact, outstanding medical costs are a huge contributing factor in many personal bankruptcies. By some studies, at least 25 percent and as many as 50 percent of bankruptcies include significant medical debt. If you’re thinking about filing a bankruptcy case to get a handle on your medical debt, here’s what you need to know.

Is There a "Medical Bankruptcy?"

There’s no such thing as a “medical bankruptcy”. Even though you’re filing a bankruptcy case to get rid of overwhelming medical debt, you won’t be able to limit the case to just outstanding medical bills. The bankruptcy laws are designed to be as fair as possible to the debtor (the person who files the bankruptcy case) and to the creditors. Medical debt is considered the same as credit card debt, old utility bills, personal loans, and money you’ve borrowed from friends and family. These are all similar enough that the bankruptcy code treats them the same way. Therefore, if you’re filing a case to get relief (what we call “discharge”) medical debt, you’ll also eliminate those other unsecured debts, too.

In fact, bankruptcy is not at all a “pick and choose” project. When you file a case, you’re required to list all your debts, personal property, and real estate.

You must disclose all your family income and all family expenses, even if your spouse will not be filing bankruptcy with you. You’ll also provide other details of your financial life, like your marital status, recent debt payments,,and recent property transfers or sales.

Types of Bankruptcy

Most people file one of two types of bankruptcy, Chapter 7 or Chapter 13.

Chapter 7 is straight bankruptcy. The process lasts about four to six months. In the end, if all goes well (and it almost always does), you’ll receive a discharge (forgiveness) of your debts.

Not all debts in a bankruptcy case are dischargeable. Some, like recent income taxes, past due child support and alimony are not dischargeable and will survive the bankruptcy case. Some, like student loans can be discharged under very narrow circumstances.

For secured debts, like car loans and mortgages, if you want to keep the property, you’ll have to continue making payments after the bankruptcy case is over.

So, what happen to your property in a Chapter 7 case? Don’t worry. You won’t be walking around in potato sacks like you’re in some kind of cartoon. You’re allowed to keep your property if you can claim an exemption on it. Every state has an exemption list with types of property and maximum values. A few states let you use an exemption list in the bankruptcy code itself.

If you have any property that you can’t exempt, you’ll have to turn it over to a trustee appointed by the bankruptcy court to administer your case. The trustee will sell the nonexempt property and distribute the proceeds to your creditors.

Having to give up property is actually pretty rare and happens in less than 5 percent of Chapter 7 cases.

Qualifying for a Chapter 7 Case: Sounds good, right? You can get forgiveness of all your credit card and lots of other debt in a Chapter 7 case. But there is one issue. Not everyone will qualify to file a Chapter 7 case. To qualify your family income and expenses will be subjected to something called the “means test.” If your income less your reasonable and necessary expenses is less than the median income for your state you qualify. If it’s higher, your best choice is usually to file a Chapter 13 case.

A Chapter 13 case is a repayment plan that lasts from three to five years. If that sounds unattractive, you need to know that there are some very real benefits to filing Chapter 13 and making your payments through the court.

Your payment amount will be based on the debts you have and your disposable income. That means that you could very well pay many thousands of dollars less than you owe and still get a discharge of any remaining debt at the end of your plan.

Will I lose My Doctor If I Discharge the Money I Owe Him?

Many people are concerned about what will happen to their relationship with their doctors and other medical providers if they discharge the medical debt. You may think it will be difficult to visit a trusted doctor. With one exception (hospital emergency treatment) medical providers can refuse to treat you after their debt has been discharged in bankruptcy. In reality, most will not take that drastic action. They understand the need for bankruptcy and why you filed the case. Most are happy to keep you as a patient as long as you’re willing to pay the debt you incur going forward.

But, there are some providers who won’t do business with you anymore. If that happens, it may not be appealing, but you can always find another provider.

You might feel better knowing that there’s no law or rule that would prevent you from paying those medical bills after your bankruptcy case is over and you’re better able to afford it. It’s completely up to you who you pay and how much. If you want to pay Dr. Kildare, but not your credit card. That’s your business.