Bankruptcy and Medical Debt: Everything You Need to Know
Medical debt is one of the most significant financial burdens that Americans face. According to a study performed by the Kaiser Family Foundation, over 26 million Americans are struggling to pay their medical bills, and with the rising cost of healthcare, this number is expected to increase.
Medical bills can quickly spiral out of control, even with health insurance coverage. It only takes one major medical emergency or chronic illness to accumulate thousands of dollars in medical debt. Unfortunately, this debt can quickly lead to bankruptcy, which can have lasting consequences.
If you are struggling with medical debt and considering bankruptcy, it is essential to know your options and the steps involved in the process. This article will walk you through everything you need to know about bankruptcy and medical debt, including frequently asked questions.
What is Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to eliminate or restructure their debt. It is a tool designed to provide a fresh financial start to those who cannot pay off their debts.
When an individual or business files for bankruptcy, they are granted an automatic stay, which stops all collection efforts, including lawsuits, wage garnishments, and phone calls from creditors. This stay provides immediate relief and allows individuals to focus on resolving their financial issues.
There are two primary types of bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy because the individual’s non-exempt assets are sold, and the proceeds are used to pay off creditors. The remaining debt is then discharged, with some exceptions.
Chapter 7 bankruptcy is ideal for those who cannot afford to make any payments toward their debts. It is essential to note that not all debts can be discharged in Chapter 7, including some tax debts, student loans, and child support.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is often referred to as “reorganization” bankruptcy because it involves a repayment plan rather than liquidation of assets. The individual submits a plan to the court to pay back all or some of their debt over three to five years. Once the repayment plan is completed, any remaining debt is discharged.
Chapter 13 bankruptcy is ideal for those who have a steady income, as it requires regular payments to creditors. It is also helpful for those who are facing foreclosure or repossession of assets, as it can help them keep their property.
What is Medical Debt?
Medical debt is any unpaid medical bill that an individual owes to a healthcare provider. It can include bills for doctor visits, medical tests, hospital stays, and prescription medications.
Medical debt is often unexpected and can quickly accumulate into large amounts, making it challenging to pay off. Even with health insurance coverage, medical bills can still be costly, leading to financial stress and anxiety.
How Does Medical Debt Affect Bankruptcy?
Medical debt can be included in bankruptcy. It is considered an unsecured debt, meaning it is not backed by collateral, such as a car or a house.
In Chapter 7 bankruptcy, medical debt can be discharged along with other unsecured debts, such as credit card debt and personal loans. However, there are limits to the amount of medical debt that can be discharged, depending on the individual’s income and expenses.
In Chapter 13 bankruptcy, medical debt is included in the repayment plan. The individual pays back a portion of the debt over three to five years in addition to other secured and unsecured debts.
Steps to Filing for Bankruptcy Due to Medical Debt
If you are considering filing for bankruptcy due to medical debt, here are the steps involved in the process:
1. Evaluate Your Financial Situation
The first step is to evaluate your financial situation to determine if bankruptcy is the best option for you. Consider your income, expenses, and debt to determine if you qualify for Chapter 7 or Chapter 13 bankruptcy.
Consult with a bankruptcy attorney to review your options and determine the best course of action.
2. Gather Your Financial Information
Gather all of your financial information, including your income, expenses, and debts. This information will be used to file your bankruptcy petition.
3. Complete a Credit Counseling Course
Before filing for bankruptcy, you must complete a credit counseling course from an approved provider. This course must be completed within 180 days before filing.
4. File Your Bankruptcy Petition
File your bankruptcy petition with the court. This includes a list of all of your debts, assets, and financial information.
5. Attend a Meeting of Creditors
After filing your bankruptcy petition, you are required to attend a meeting of creditors. This is a meeting where you will be questioned by your creditors and the bankruptcy trustee about your finances.
6. Complete Your Repayment Plan (Chapter 13 Only)
If you file for Chapter 13 bankruptcy, you must complete your repayment plan over three to five years.
7. Receive Your Discharge
After completing your bankruptcy requirements, you will receive a discharge of your debts. This discharge means that you are no longer responsible for those debts.
1. Will filing for bankruptcy due to medical debt affect my credit score?
Yes, filing for bankruptcy will negatively impact your credit score. However, if you are struggling with medical debt, your credit score is likely already impacted.
2. Can I keep my house and car if I file for bankruptcy?
It depends on the type of bankruptcy you file for and the equity you have in your house and car. In Chapter 7 bankruptcy, non-exempt assets may be sold to pay off creditors. In Chapter 13 bankruptcy, you may keep your house and car as long as you can make the required payments.
3. Can medical debt be discharged in bankruptcy?
Yes, medical debt can be discharged in bankruptcy. It is considered an unsecured debt.
4. What other debts can be included in bankruptcy?
Other debts that can be included in bankruptcy include credit card debt, personal loans, and some tax debts.
Medical debt can be overwhelming and lead to bankruptcy. However, bankruptcy can provide relief and a fresh financial start for those who cannot pay off their debts. It is essential to evaluate your financial situation and consult with a bankruptcy attorney to determine the best course of action. As with any major financial decision, it’s important to explore all options and understand the potential consequences thoroughly.
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Medical debt is a significant financial burden for over 26 million Americans and can quickly spiral, even with health insurance coverage. Bankruptcy is a legal process that allows individuals or businesses to eliminate or restructure their debt, and it can provide relief for those struggling with medical debt. There are two primary types of bankruptcy: Chapter 7 and Chapter 13, each with its own advantages and limitations. Medical debt is considered an unsecured debt and can be discharged in bankruptcy. However, filing for bankruptcy will negatively impact an individual’s credit score. It is essential to evaluate your financial situation and consult with a bankruptcy attorney to determine the best course of action.