Filing Bankruptcy on Medical Bills
While the term ‘Medical Bankruptcy’ is commonly used to describe bankruptcy due to unpaid medical bills, it is not a legal term recognized in U.S. bankruptcy law. This term is often used to refer to the use of bankruptcy proceedings to discharge unpayable medical debts. 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 that you understand what “medical bankruptcy” is and how to prevent it, including the medical debt that precedes it.
What is Medical Bankruptcy
Bankruptcy is a legal process designed to help individuals discharge or reorganize their debts, including creating manageable repayment plans. You can file for medical bankruptcy if you cannot repay mounting medical debt and must start fresh. After declaring bankruptcy, an automatic stay goes into effect, preventing creditors from collecting unpaid debts, including medical bills, during the bankruptcy process.
Can You File Bankruptcy on Medical Bills – What Is Medical Bankruptcy?
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.
However, bankruptcy can help discharge various types of debts, but not all, such as certain taxes, child support, and alimony. For instance, in some cases, bankruptcy cannot be used to discard child support payments, alimony, and student loans.
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 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 have agreed not to report medical debt that has been paid or is less than a year old to allow time for insurance payments.
- Credit reporting agencies must wait 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 that specializes in hearing bankruptcy cases. You can file for medical bankruptcy alone or with your spouse.
Depending on the type of bankruptcy you file, you may have to give away some assets or 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 US bankruptcy forms are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy involves liquidating non-exempt assets to repay creditors, which can include 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. Filing for Chapter 13 bankruptcy involves court and legal fees, typically around $310, subject to change based on court policies.
A key difference between Chapter 7 and Chapter 13 bankruptcy is the means test for Chapter 7, which compares your income to the state median to determine eligibility. Your monthly income has to be less than your state’s median income to qualify for Chapter 7 bankruptcy. However, if you have a source of regular income and can pay the debt over time, 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
Some healthcare providers and hospitals offer debt forgiveness programs based on your income level and financial need, which can reduce or eliminate your debt.
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 must 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 into a feasible and affordable payment plan, besides offering a significant discount if you 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.
Conclusion
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.
See Also
Is Medical Insurance Tax Deductible
Are Medical Expenses Tax Deductible
Are Medical Bills Tax Deductible
Ways to Get Medical Bill Debt Forgiveness
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