Bankruptcy is a legal mechanism in the U.S. designed to give individuals a fresh financial start when overwhelmed by significant debt. Although it comes with substantial risks and long-term impacts, it is often the most suitable financial strategy for someone under considerable debt pressure. Federal law typically allows most medical debt to be discharged in bankruptcy, meaning you won't be obliged to repay this debt. However, it's essential to understand several aspects of this process.
Understanding Bankruptcy and Medical Debt
Medical debt is typically unsecured debt. That means there is no collateral behind that debt. Unlike your house, where the lender can force foreclosure and the sale of your home if you stop making payments, medical providers do not have that type of recourse.
Medical debt should not be considered your ultimate priority in monthly payments. It is unsecured and dischargeable in bankruptcy. If you are struggling to meet your financial obligations with medical debt and other debts, consider the value of seeking bankruptcy.
Eligibility for Bankruptcy
To discharge a medical debt in bankruptcy, you must be eligible to file for it. Eligibility is based on the Means Test, a process that helps to determine if you meet the requirements based on your income, expenses, and unsecured debt. Although your income must generally fall below your state's median monthly income to qualify, you may still be eligible if your disposable income after necessary expenses is insufficient to pay off your unsecured debts. The specifics of the Means Test can vary by state due to differing living costs, so you may also need to meet other criteria.
Medical Debt and Chapter 7 Bankruptcy
There are two primary forms of bankruptcy under federal law, with Chapter 7 being the most sought-after. Under this chapter of the bankruptcy code, you have the right to request that the court:
- Seize any assets over and above protected limits.
- Sell those assets to pay your debts.
- Discharge any remaining debt you have.
If you are insolvent, which means you cannot make payments and do not have money in the bank or own significant assets, this method is often the most direct. Under it, your medical debt is discharged. You will not have to repay it as long as you meet all of the requirements for Chapter 7 bankruptcy. If you own significant assets above any protected levels (such as your home, having a savings account, or owning precious personal assets), the court will seize those assets to offset your debts to all creditors.
Remember that this should be a last resort because this type of legal action will carry 7 to 10 years of reporting on your credit history.
Medical Debt and Chapter 13 Bankruptcy
Under Chapter 13 bankruptcy, the goal is to protect your assets and ask the court to help you make repaying your debt more manageable. In this method, the court will work with you to reorganize your debt to make it more manageable. It can help you repay some or all of your debt.
You'll pay the court each month for an agreed-upon amount. Then, the court will pay out those funds to your creditors. This type of agreement typically goes on for 3 to 5 years. During that time, you will have minimal access to credit, and you will need to meet all requirements set by the court for credit counseling and repayment.
Any debt you still owe is discharged at the end of the term. Typically, that will include much of your medical debt since debts on secured assets are typically protected. However, the significant benefit of Chapter 13 is that you do not lose any of your assets. That means you continue to own your home and all your possessions.
Impact on Credit and Future Loans
Bankruptcy carries consequences. In all situations, the notice you filed for bankruptcy will remain on your credit report for the next 7 to 10 years. That means anyone who pulls a copy of your credit report will see that information.
It also leads to a drop in your credit score. It will take some time for this to recover. It may be challenging to obtain new loans during that period, and it may be impossible. Also note that most existing credit lines, like credit cards, are closed during bankruptcy.
However, think long term. If you struggle for the next ten years to pay back what you owe in medical debt, your credit score will also be negatively impacted. For some, it may improve within a few years after filing for bankruptcy.
Alternatives to Bankruptcy
There are alternatives to filing for bankruptcy. One could consider debt management methods or credit counseling. However, the suitability of these strategies can depend on your financial circumstances and the debt you owe. A financial advisor can guide you in creating a budget and negotiating lower payments on all your debt, including medical debt. Remember, you should explore these options in detail as they have potential benefits and drawbacks.
Finding a Bankruptcy Attorney or Financial Counselor
Bankruptcy can provide much-needed relief from overwhelming debt. However, it should be regarded as a last resort due to its severe long-term impacts on your credit report and overall financial health. It is always recommended to seek guidance from financial professionals to understand the potential implications of this financial decision.
When you're uncertain about your options, seek support. A bankruptcy attorney often offers a free consultation to help you understand what filing for bankruptcy might mean for you. Similarly, a financial counselor can provide insight into your potential alternatives and strategies. Regardless of your current financial situation, remember that help is available, and you have rights and options to manage your medical debt.