Can you file for bankruptcy on medical bills? – Forbes Advisor


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To say that health care for Americans is very expensive is like saying that there are many miles to the nearest star. Both are measured in trillions. U.S. healthcare spending reached $4.1 trillion in 2020, according to the most recent data from the Centers for Medicare & Medicaid Services. At the individual level, Americans spent $12,530 per person on medical care that year.

The cost of health care is a big issue for Americans and, in fact, is a primary factor in personal bankruptcy. But filing for bankruptcy can be an effective way to reduce or eliminate crippling medical bills.

Medical debt and bankruptcy

The cost of health care is a significant financial burden for many people. A 2021 Census Bureau study found that nearly one in five households (19%) could not afford medical care when needed. The Consumer Financial Protection Bureau reported in 2022 that whenever debt collectors contacted consumers, medical debt was the most likely reason.

This close link between poor health and financial problems leads to bankruptcy. The link was notably established in a 2000 study which concluded that medical bills represented 40% of bankruptcy filings the previous year.

That was years before the Affordable Care Act, but the expansion of health insurance coverage under the law known as Obamacare didn’t seem to make much of a difference. In a 2019 study of 910 Americans who filed for bankruptcy, two-thirds said their filings were related to medical issues.

Why do approximately 530,000 families seek bankruptcy protection against medical bills each year? The short answer is: Because it works.

Can you discharge a medical debt in the event of bankruptcy?

There is no special process for filers to discharge only one type of debt. This way, you may be able to get rid of your medical debts in the event of bankruptcy, and all your other debts may also disappear. It depends on the types of debts you have and the type of bankruptcy you file.

Debts in bankruptcy are categorized as “secured” versus “unsecured” and “senior” versus “non-senior”. Secured debt is backed by some kind of collateral, such as a car or house, while unsecured debt is not backed by an asset. Priority debts – including tax bills, student loans, child support and alimony – are unsecured but given special status.

Medical bills are generally classified as non-priority unsecured debt, and this is a type of debt most likely to be discharged or erased in the event of bankruptcy. Although a discharge is bad news for creditors, it can be great for the borrower because it means the debt doesn’t have to be repaid.

Chapter 7 Bankruptcy and Medical Debt

Filing for creditor protection under Chapter 7 of the US Bankruptcy Code can help troubled borrowers get rid of debt, medical or otherwise. Chapter 7 is called a liquidation bankruptcy.

In a Chapter 7 case, a trustee in bankruptcy sells the debtor’s eligible assets to pay off creditors. Some assets are exempt, depending on the laws of the filer’s state. The whole process takes four to six months. When it’s over, the filer will likely be relieved of their medical debt, even though no money has been collected to pay healthcare providers. In fact, most Chapter 7 cases are “assetless” filings, where creditors receive nothing, but debts are paid anyway.

The downside of Chapter 7 is that filers may have to give up property, including their homes in some cases. Chapter 7 is only for people who don’t have enough income to repay creditors.

To check if someone qualifies, the bankruptcy court uses a means test. People who are employed and earn enough to repay creditors generally must file for Chapter 13.

Chapter 13 Bankruptcy and Medical Debt

In Chapter 13 bankruptcy, sometimes called employee bankruptcy, debtors create a plan to repay their creditors over a period of three to five years. They will use their disposable income to make payments, and sometimes medical bills need to be paid off as part of the process.

The benefit is that filers may be able to preserve their relationships with health care providers if they reimburse at least some of their bills. This can be important to a debtor’s future health and well-being.

Other Ways to Get Rid of Medical Debt

If your only debt is from medical bills, bankruptcy may not be the best choice. For one thing, bankruptcy is hard on your credit: a Chapter 7 bankruptcy can stay on your credit reports for up to 10 years from the date of filing, while a Chapter 13 bankruptcy can stay on your credit reports for up to 10 years. seven years after the filing date. A bankruptcy is considered a derogatory mark that can lower your credit score, although the impact diminishes over time.

Meanwhile, many credit reporting models ignore unpaid medical bills or give them less weight. And recently, the major credit reporting agencies agreed to several changes regarding medical debt.

Medical debts that were in collection but have been paid off will no longer appear on credit reports, and consumers will have a one-year grace period before unpaid medical debts are listed. Medical debt under $500 will not show up on credit reports at all.

So you might consider avoiding bankruptcy and instead trying these options to deal with hefty healthcare bills:

  • Negotiate with the medical provider. Hospitals and other providers can now accept smaller sums of money rather than continue collection efforts whose outcome is uncertain.
  • Enter a debt management plan. A counselor from a nonprofit credit counseling agency can help you establish a debt management plan and can negotiate with your creditors on your behalf. You may be able to lengthen the repayment term, lower your interest rate, waive fees, or make repayment more manageable in other ways.
  • Consolidate your debt. You may be able to take out a low-interest personal loan or apply for one of the best credit cards with a 0% APR and use it to pay off your medical debt. These steps may give you some breathing room, but you will need to develop a plan to pay off your outstanding debt.
  • Sell ​​stuff. You can also sell certain assets, like a boat or a second car, and direct the proceeds to health care creditors. It is a kind of modified liquidation, without the supervision of the trustee in bankruptcy.
  • To collect money. Crowdfunding is a new approach to dealing with medical debt, by asking the public for money through an online platform. GoFundMe is especially popular with people raising money to pay medical bills. In five years, according to one study, GoFundMe campaigns have raised more than $2 billion. However, it should be noted that campaigners were looking for four times as much, or more than $8.45 billion, and only a third of campaigns reached even half of their goal.

Conclusion

Personal bankruptcy can be an effective way to get rid of crippling medical bills. But it can come at a significant cost to your credit profile and, potentially, your relationships with doctors and other healthcare providers. Chapter 7 bankruptcy may require you to give up many of your assets, while Chapter 13 means you commit to a one-year repayment plan.

However, when your personal financial situation is on life support due to medical bills, bankruptcy can represent an opportunity to return to a healthy financial position.

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