Medical Bills Under Bankruptcy Law
Debt from medical bills is probably the leading reason for bankruptcy in the United States. A number of people must file for bankruptcy for medical debt even if they have health insurance. Most people who file for bankruptcy are able to get their medical debts discharged. Bankruptcy should be seen as a last resort, even when you face substantial medical debt. In some cases, it may be more prudent to try to negotiate a payment plan with the health care provider or hospital where you incurred the debt, rather than allow the claim to go to collections, where you will no longer have as much leeway.
Not all debts are dischargeable through bankruptcy, and a bankruptcy trustee’s job in administering bankruptcy cases is to make sure creditors are repaid to the extent possible in the order of priority. The first priority for the trustee is to make sure secured creditors and priority unsecured creditors are repaid. Secured debts are those secured by collateral, such as a car, house, or goods. Secured creditors are creditors with liens on your property that allow them to either repossess it or foreclose on it if you do not repay the loan. Priority unsecured debts include debts for such items as student loans, child support, and certain taxes.
Unsecured debts are debts that collateral does not secure. In other words, an unsecured creditor cannot take your property without first filing a lawsuit, proving the debt, obtaining a judgment, and enforcing that judgment. Unsecured debts can be either priority debts or non-priority debts. Generally, medical debts are not secured by property, so the court and a bankruptcy trustee will not consider them secured debts. The last priority for a trustee in a Chapter 7 or Chapter 13 bankruptcy is unsecured debts, like medical debts or credit card debts. However, medical debt is usually a non-priority unsecured debt, which means it is last in line for repayment and often will not be repaid at all.
What Type of Bankruptcy Should I File?
If you have substantial medical debt and pass the means test, your best option may be to file Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, the trustee is tasked with getting creditors repaid to the extent possible by liquidating all nonexempt assets and distributing the funds in order of priority. In most Chapter 7 bankruptcies, however, there are insufficient assets for purposes of repaying all creditors. This means that medical creditors, as non-priority unsecured creditors, will not get repaid in full, or at all. There is no cap to how much medical debt you are permitted to discharge through Chapter 7.
For people with substantial assets who pass the means test, Chapter 7 may not be the best option when trying to wipe out significant medical debt. For those debtors, assuming they are employed, Chapter 13 may be a better choice. Under Chapter 13, you will need to attend credit counseling and devise a debt repayment plan to pay off debts over a 3-5 year period. The plan must address all secured debts and some of the unsecured debts. This means that some medical creditors may get repaid, depending on your income and how many secured debts you have.
