Can You File Bankruptcy for Medical Bills?

Medical expenses can escalate quickly and unexpectedly, often leading individuals to financial hardship. For many, the prospect of bankruptcy may be a viable option to address overwhelming medical bills. This article explores the nuances of filing for bankruptcy specifically for medical debts, addressing common questions like Can You File Bankruptcy for Medical Bills? and What Does it Cost to File? We'll examine the types of bankruptcy that can assist with medical debt relief, the costs associated with filing, and factors to consider before taking this significant step.

1. Understanding Medical Debt and Bankruptcy

Medical bills are one of the leading causes of financial distress in the United States. An unexpected illness or accident can create a substantial financial burden, especially if insurance coverage is limited or lacking altogether. The bankruptcy system allows individuals to discharge or reorganize various debts, including medical expenses, through either Chapter 7 or Chapter 13 bankruptcy.

Can You File Bankruptcy for Medical Bills?

Yes, you can file for bankruptcy to discharge medical debts. In both Chapter 7 and Chapter 13 bankruptcies, medical bills are classified as unsecured debts, similar to credit card debt or personal loans. Unsecured debts are not tied to any specific collateral, making them eligible for discharge or reorganization under bankruptcy.

2. Types of Bankruptcy for Medical Bills

Two common types of bankruptcy are most relevant to individuals with significant medical debt: Chapter 7 and Chapter 13. Each type has different eligibility requirements, processes, and outcomes.

Chapter 7 Bankruptcy

Chapter 7, often referred to as "liquidation bankruptcy," allows eligible individuals to discharge most unsecured debts, including medical bills, without having to repay them. However, not everyone qualifies for Chapter 7; a means test determines eligibility based on income and other financial factors.

Advantages of Chapter 7 for Medical Debt Relief:

• Quick Discharge: Medical debts can be discharged within a few months.

• No Repayment Plan: Once the bankruptcy is completed, you are no longer liable for medical debts included in the filing.

• Fresh Start: Chapter 7 allows individuals to start anew financially without the burden of significant medical bills.

Disadvantages of Chapter 7 for Medical Debt Relief:

Asset Liquidation: In some cases, non-exempt assets may be sold to pay creditors.

Impact on Credit Score: Filing for bankruptcy has a negative impact on your credit score, which can make it more difficult to obtain credit or loans in the future.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, often known as "reorganization bankruptcy," allows individuals to create a repayment plan that typically lasts three to five years. This type of bankruptcy is more suited to those who have a regular income and can afford to pay back a portion of their debts over time.

Advantages of Chapter 13 for Medical Debt Relief:

Retain Assets: You can keep your property while following a structured repayment plan.

Debt Reorganization: Unsecured debts, including medical bills, are reorganized, often resulting in a partial repayment.

Less Impact on Credit: Chapter 13 remains on your credit report for seven years, as opposed to ten years for Chapter 7, which can be slightly less damaging to creditworthiness.

Disadvantages of Chapter 13 for Medical Debt Relief:

Extended Process: The repayment plan lasts for three to five years, requiring a long-term commitment.

Payment Requirements: You must make regular payments on the reorganized debts as part of the bankruptcy plan.

3. Eligibility Requirements for Bankruptcy

Before filing for bankruptcy, it’s important to understand the requirements and limitations for each type.

Chapter 7 Eligibility (Means Test)

The means test is designed to prevent higher-income earners from filing for Chapter 7. It compares your income to the median income for your state. If your income is below the state median, you are generally eligible to file for Chapter 7. If your income exceeds the median, you may still qualify after deductions, but otherwise, Chapter 13 might be your only option.

Chapter 13 Eligibility

Chapter 13 bankruptcy does not have the same income restrictions as Chapter 7, but it does require a regular source of income to fund the repayment plan. Additionally, there are debt limits in Chapter 13: unsecured debts must be below $465,275 and secured debts below $1,395,875 (as of current federal limits).

4. What Does it Cost to File?

Filing for bankruptcy is not free, and the associated costs should be considered carefully.

Chapter 7 Costs

Filing Fees: Approximately $338 (subject to change based on federal adjustments).

Attorney Fees: Legal fees for Chapter 7 can range from $1,000 to $3,500, depending on the complexity of the case and region. While it is possible to file without an attorney, it is generally advisable to have legal assistance, as bankruptcy law is complex.

Chapter 13 Costs

Filing Fees: Approximately $313.

Attorney Fees: Because Chapter 13 requires an extended repayment plan, attorney fees are generally higher than Chapter 7. The average cost ranges from $3,000 to $5,000, and many attorneys offer installment plans to spread out payments.

For those with limited income, some courts offer fee waivers or payment plans for filing fees. Additionally, legal aid organizations may provide assistance for low-income individuals.

5. Considerations Before Filing for Medical Debt Bankruptcy

While bankruptcy may provide relief, it is not the only solution, nor is it without consequences. Here are several factors to consider:

Credit Impact: Bankruptcy can remain on your credit report for up to ten years (for Chapter 7) and seven years (for Chapter 13), impacting your ability to obtain credit, rent property, or even secure employment.

Effect on Co-Signers: If someone has co-signed on medical debt, they may still be liable even if the debt is discharged through bankruptcy.

Alternative Solutions: Negotiating with medical providers, seeking financial assistance, or consolidating debt are alternatives that may avoid the need for bankruptcy.

Future Financial Stability: Bankruptcy can provide relief but does not solve underlying financial habits or issues. Budgeting and financial planning can help prevent future debt accumulation.

6. The Process of Filing Bankruptcy for Medical Bills

The bankruptcy process begins with pre-filing credit counseling. Once completed, you can file a petition with the bankruptcy court. This petition will list all assets, liabilities, income, and expenses. You must also disclose any recent financial transactions to ensure transparency.

After filing, an automatic stay is issued by the court, temporarily stopping creditors from attempting to collect debts. The court will then assign a trustee to your case to oversee the process and distribute any applicable payments in a Chapter 13 case.

7. The Decision to File: Weighing the Pros and Cons

Bankruptcy offers a legitimate solution for those struggling with overwhelming medical debt. However, it is a serious decision with long-lasting implications. Consulting a bankruptcy attorney can be invaluable in understanding the eligibility requirements, costs, and potential impacts on your financial future.

Yes, you can file bankruptcy for medical bills, as they are classified as unsecured debts eligible for discharge in both Chapter 7 and Chapter 13.

Chapter 7 provides a faster discharge without repayment but requires passing a means test.

Chapter 13 allows debt reorganization with a structured repayment plan, making it ideal for those with steady income.

The cost to file includes both filing and attorney fees, which vary based on the type of bankruptcy and complexity of the case.

Final Thoughts

Filing bankruptcy for medical debt is a significant step that requires careful consideration and professional guidance. While it can provide a path toward financial recovery, it’s important to explore all available options and understand the costs, responsibilities, and long-term effects associated with filing.