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What is Medical Bankruptcy?

There is no chapter in the Bankruptcy Code for medical bankruptcy. It doesn’t exist as a specific form of bankruptcy relief offered by the federal government. The term “medical bankruptcy” describes bankruptcy caused by medical debt. Many Americans struggle with the exorbitant costs of healthcare and are saddled with unexpectedly high medical bills. When medical bills and medical debt become overwhelming, some turn to bankruptcy as a method of relieving their debt burden.

This article will clear up some common misconceptions about medical bankruptcy and answer the following questions:

  • What does medical bankruptcy mean?
  • How do I file for medical bankruptcy?
  • What percentage of bankruptcies are medical?
  • Can medical debt be discharged through bankruptcy?
  • What are alternatives to bankruptcy for eliminating medical debt?

What does medical bankruptcy mean?

  • “Medical bankruptcy” is a non-legal term for describing bankruptcy resulting from medical debt.

Again, there is no specific chapter of the Bankruptcy Code dedicated to medical bankruptcy. In recent years, increased instances of individuals filing for bankruptcy due to medical debt led to popular usage of the term “medical bankruptcy.” While there is debate as to the true severity of the problem, there is little doubt that enormous medical bills can lead to bankruptcy.

Despite having health insurance, many have found themselves burdened by medical debt resulting from charges not covered by the fine print of their insurance policy. To alleviate this debt burden, some have turned to filing for bankruptcy as a solution. Individuals can discharge their medical debt through either Chapter 7 or Chapter 13 bankruptcy relief.

How do I file for medical bankruptcy?

  • Although “medical bankruptcy” is not a form of bankruptcy relief, medical debt can be discharged through a filing of Chapter 7 or Chapter 13 bankruptcy.

You can’t specifically file for “medical bankruptcy.” Nowhere on the bankruptcy paperwork does it require the debtor to specify the reason(s) for filing bankruptcy. However, bankruptcy can still be a solution to your medical bills crisis. Unpaid medical bills eventually turn into medical debt. Medical debt is dischargeable via bankruptcy. Those who wish to file for bankruptcy resulting from medical debt may do so through either Chapter 7 or Chapter 13.

In Chapter 7, you can discharge your medical debt after the court liquidates your non-exempt assets. In Chapter 13, your medical debt is discharged after the completion of a three- to five-year repayment plan. The two chapters have different eligibility criteria; your income and other factors may play a part in determining whether you qualify for Chapter 7 or Chapter 13. (You can learn more about the different types of bankruptcies and which one you qualify to file under.)

What percentage of bankruptcies are medical?

  • Medical debt is both a direct and indirect cause of bankruptcy in a substantial number of cases.

We don’t know how many bankruptcies are caused by medical debt. Medical debt bankruptcy numbers will fluctuate from year-to-year, influenced by factors like economic variables, political policy shifts, etc. During the debates over Obamacare, health care reform advocates suggested that more than half of all bankruptcies in the United States were caused by medical bills. Numerous studies have refuted that statistic. They argue instead that “medical debt is a modest but rising component of debt in consumer bankruptcy.” Regardless, there is little doubt that bankruptcy due to medical bills is a serious problem in the United States.

Can medical debt be discharged through bankruptcy?

  • Yes, medical debt is a form of debt dischargeable through the bankruptcy process.

Bankruptcy law classifies medical debt as unsecure debt. Unsecure debt simply means it is debt that is not tied or attached to any property or assets that you own. Bankruptcy is frequently used as a method for discharging unsecure debts like credit card debt, medical debt, etc.

Secure debts, meanwhile, are debts tied to assets which can be repossessed by the creditor if the debt is not paid. A home mortgage is an example of a secure debt; if you fail to pay your mortgage, the bank may foreclose on your home. A discharge of your medical debt through bankruptcy means that you are no longer liable to repay this debt. The hospital, doctor’s office, or collection agency can no longer send you notices or call you to collect on a medical bill once that debt has been discharged. (Learn more about how bankruptcy affects your debts.)

What are alternatives to bankruptcy for eliminating medical debt?

  • Medical creditors are typically much easier to work with (in terms of repayment) than creditors or collectors of other forms of debt.

If medical debt is the primary reason you’re considering a bankruptcy filing, there are alternatives you may want to consider first. Unlike other forms of debt, medical creditors are usually more willing to work with you on repayment, possibly even accepting a lower amount. Many medical offices and hospitals will hold the bill as long as possible within their own billing departments before sending it off to a collector, if at all. Since medical creditors rarely belong to credit reporting agencies, medical debt is less likely to hurt your credit score than other types of debt. As such, there is substantial incentive to contact your care provider or hospital to negotiate a plan of repayment. Being saddled with medical debt can be onerous. It may be beneficial to speak with a bankruptcy lawyer so you can have a better understanding of all your options.

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