{"id":19237,"date":"2022-11-29T14:49:12","date_gmt":"2022-11-29T20:49:12","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=19237"},"modified":"2024-05-06T14:28:13","modified_gmt":"2024-05-06T20:28:13","slug":"what-is-medical-bankruptcy","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/life-events\/what-is-medical-bankruptcy.html","title":{"rendered":"What is medical bankruptcy and does it affect your credit?"},"content":{"rendered":"\n
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Medical bankruptcy is an unofficial term for clearing out medical debt under Chapter 7 or Chapter 13 bankruptcy.<\/h2>\n<\/div>\n\n\n\n

According to the U.S. Census Bureau<\/a>, Americans hold nearly $200 billion worth of medical debt. As you can imagine, medical debt can cause quite a bit of financial distress for anyone who has it.<\/p>\n\n\n\n

Medical bills can affect your credit<\/a> and make paying off other bills difficult. Filing bankruptcy due to hefty medical bills may help you eliminate your medical debt and have a fresh start, but it isn\u2019t always a perfect solution. Here, you\u2019ll learn what medical bankruptcy is and how it works so you can decide if it\u2019s the right choice for your situation.<\/p>\n\n\n\n

What does medical bankruptcy mean?<\/h2>\n\n\n\n

\u201cMedical bankruptcy\u201d isn’t a legal term used in bankruptcy court, but it\u2019s often used unofficially to describe filing for bankruptcy to eliminate medical debt. The most common forms of bankruptcy for individuals struggling with medical debt are Chapter 7<\/a> and Chapter 13<\/a>\u2014they have some similarities as well as differences for discharging debt.<\/p>\n\n\n\n

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Can you discharge medical debt in bankruptcy?<\/h3>\n\n\n\n

Both Chapter 7 and Chapter 13 can help you discharge medical debt as long as you follow the court\u2019s guidelines and are approved for the filing. When you file bankruptcy, your debts are categorized as either secured or unsecured debts. Secured debts are types of debts for which you provide collateral or a down payment, like a home or a vehicle. Credit cards and other non-collateralized debts are unsecured debts.<\/p>\n\n\n\n

Medical bills fall under the unsecured debts category, which gives you more options when you\u2019re filing for bankruptcy. For example, if you\u2019re approved for Chapter 7 bankruptcy, you may be able to have the entirety of your medical debt eliminated.<\/p>\n\n\n\n

Which type of bankruptcy should you file for medical debt?<\/h2>\n\n\n\n

Choosing which form of bankruptcy to file depends on your unique circumstances as well as what the courts will approve. The primary difference between Chapter 7 and Chapter 13 bankruptcy<\/a> is that Chapter 7 allows you to eliminate debt after liquidating some of your assets. With Chapter 13 bankruptcy, you\u2019re provided with a repayment plan to pay off debts over time.<\/p>\n\n\n\n

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How to file Chapter 7 bankruptcy for medical debt<\/h2>\n\n\n\n

To qualify and file for Chapter 7 bankruptcy, you\u2019ll need to pass a means test. The means test is when the court takes a look at your household income compared to the average in your state. If you\u2019re below a certain threshold, you can file for Chapter 7. When people ask, \u201cDoes bankruptcy clear medical debt?\u201d they\u2019re usually referring to Chapter 7.<\/p>\n\n\n\n

During a Chapter 7 bankruptcy, you\u2019re assigned a trustee who evaluates your financial situation and your assets. For assets that don\u2019t fall under your state\u2019s specific exemptions, you may be required to sell them in order to pay back a portion of your debt. Once the assets are sold to pay back creditors, the remaining debt is removed.<\/p>\n\n\n\n

How to file Chapter 13 bankruptcy for medical debt<\/h2>\n\n\n\n

People with a steady source of income typically file Chapter 13 for their medical bankruptcy. If your medical condition isn\u2019t preventing you from working and receiving regular pay, this may be your best option for bankruptcy.<\/p>\n\n\n\n

Under a Chapter 13 bankruptcy filing, you submit a proposal to the courts, which is based on your income. The proposal contains information on how much you believe you can pay on a monthly basis. You\u2019re given a three-to-five-year timeline to repay your debts based on the court\u2019s decision. Once your repayment plan is complete, the court discharges your bankruptcy.<\/p>\n\n\n\n

Alternatives to filing medical bankruptcy<\/h2>\n\n\n\n

Medical bankruptcy is an option that many people turn to, but it can affect your credit for seven to 10 years. Derogatory marks on your credit can make it difficult to apply for loans, and it can also result in putting down larger deposits when renting a home or turning on utilities.<\/p>\n\n\n\n

Before filing for medical bankruptcy, here are some alternative ways to pay your medical bills and avoid bankruptcy:<\/p>\n\n\n\n