Can You File Bankruptcy on Medical Bills – Overview
When you file bankruptcy due to mounting, unpaid medical bills, it is unofficially called “Medical Bankruptcy” in the US. The term describes the legal procedure of bankruptcy to eliminate medical debt that cannot be repaid. Reports show that rising medical debt has led to a significant rise in medical bankruptcies in the United States.
Tens of thousands of Americans cannot repay their medical bills. The high cost of health care has also left millions of Americans underinsured or completely uninsured. This has resulted in many having to file for bankruptcy.
However, before choosing this option, it is highly recommended to understand what “medical bankruptcy” is and how to prevent it, including the medical debt that comes before it.
What is Medical Bankruptcy?
Bankruptcy is a convenience that lets you either get rid of debt or develop a feasible repayment plan, usually in installments. You can file for medical bankruptcy if you cannot repay mounting medical debt and need to make a fresh start. Once you have declared bankruptcy, your creditors will not be able to pursue you for repaying your unpaid medical bills.
Though you can discard medical debt using bankruptcy, it is not the only debt you may have. You can even clear out credit card debt, personal loans, and other types of debt if you have them by filing for bankruptcy.
Still, bankruptcy may only help you to remove some types of debt. For instance, bankruptcy cannot be used to discard child support payments, alimony, and student loans in some cases.
You need to remember that filing for bankruptcy will severely affect your credit score and can reflect on your credit score for 7 to 10 years, depending on the type of bankruptcy you file for. In addition, filing for bankruptcy tends to increase your lending risk for lenders and makes it harder to get financing for big purchases, such as a car or home loans.
However, there is some good news, thanks to recent changes in credit reporting protocols from agencies working to recollect medical debt, such as:
- Major credit reporting agencies can no longer include paid medical debt on your credit report and cannot include debt less than a year old.
- Credit reporting agencies must wait for at least one year before reporting that a medical bill has been sent to a debt collection agency.
What Should You Know About Filing for Medical Bankruptcy?
Here are 5 main points that you need to know before filing for medical bankruptcy:
1 – Medical Bankruptcy Happens When You File a Legal Petition
The bankruptcy process is initiated once you file a petition with a US federal court specializing in hearing bankruptcy cases. You can file for medical bankruptcy alone or along with your spouse.
According to the type of bankruptcy you file, you may have to give away some assets or may be asked to follow a more practical repayment plan.
You can hire a lawyer to file for bankruptcy or file the petition yourself. To find advice on filing for medical bankruptcy, it is highly recommended to consult with lawyers specializing in medical bankruptcy through the American Bar Association or through the Legal Services Corporation.
Besides these, you can also seek assistance from non-profit organizations that specialize in helping people manage medical debts and bankruptcy, which include the RIP Medical Debt service at https://ripmedicaldebt.org/ or the Upsolve team at https://upsolve.org/.
It is highly recommended that before filing for bankruptcy, you must attend credit counseling. Once you file the legal petition, you will also be required to undergo a debtor education course.
2 – Two types of consumer bankruptcy
The two more commonly used forms of bankruptcy in the US are Chapter 7 and Chapter 13.
Chapter 7 lets consumers liquidate (sell) assets/property to repay medical debt. You may have to pay around US$ 335 to file for Chapter 7 bankruptcy. On the other hand, when you file for Chapter 13 bankruptcy, the court will usually order you to adhere to a 3 to 5-year court-ordered repayment plan. To file bankruptcy under Chapter 13, you may have to pay around US$ 310 towards the court and legal fees.
The biggest difference between the two is the means test requirements for Chapter 7 bankruptcy. Your monthly income has to be less than your state’s median income if you want to qualify for Chapter 7 bankruptcy. However, if you have a source of regular income and can pay the debt over time, then you can qualify for Chapter 13 bankruptcy.
3 – File for medical bankruptcy only when you don’t have any other option
You should review the trade-offs before filing for bankruptcy owing to mounting medical debt.
Some of the things you should check before filing for bankruptcy include the following:
- Assistance from a credit counseling agency – You can work with a non-profit credit counseling agency that will help create a budget that can handle medical debt or negotiate a zero-interest payment plan with the doctor or hospital.
- Debt consolidation – You should think about debt consolidation if your debt file has been sent to a debt collections agency and you also have other unpaid medical debts. This can help to lower the interest rate you are being charged on unpaid medical bill amounts and ensure you only have to make one payment.
- Debt settlement – You can even ask about paying debt collectors off with a lump-sum payment, which is less than the actual debt amount, but is still acceptable by the debt agency.
4 – Medical debts can be forgiven too
Depending on your income and the debt you owe, you may qualify for debt forgiveness from the healthcare provider or hospital.
To do this, you should ask the hospital’s billing department if they have debt forgiveness options. Though debt forgiveness is not guaranteed, you can know if you have a similar option elsewhere.
Besides this, every non-profit and public hospital is obliged to offer and promote financial help programs, so you may also get some relief here.
5 – Medical debt can be prevented too
Here are some tips you can use to prevent incurring medical debt in the first place:
- Negotiate – You can sometimes negotiate to lower the medical debt you owe by talking with your healthcare provider.
- Financial help – Numerous nonprofit and public hospitals are required by law to offer financial assistance programs to needy patients.
- Payment plans – Some hospitals even allow patients to break the total debt amount into a feasible and affordable payment plan, besides offering a significant discount if you choose to pay the medical debt in a lump sum.
- Set up HSA – A health savings account (HSA) is offered if you have a high-deductible health insurance plan.
According to reports, some of the main reasons people file for medical bankruptcy are loss of a job, divorce from a spouse, and long-term medical care debt. Besides this, the other reasons many people file for medical bankruptcy include unexpected medical or dental bills, catastrophic medical events, lack of affordable healthcare and chronic ailments that need long-term treatment and care.