Medical debt is one of the main factors leading to bankruptcy. In fact, it’s a contributing cause in 62 percent of personal bankruptcy filings, according to a 2009 study that appeared in the American Journal of Medicine.
Medical debt differs from other forms of consumer debt, since it usually results from something completely unpredictable – an illness or injury. In addition, illness or injury often prevents a person from working and earning income to pay off the bills. Many American families are just one serious illness or injury away from bankruptcy.
Health Insurance Rarely Helps
Surprisingly, nearly three-quarters of those filing for bankruptcy because of medical debt have health insurance. Most of them are middle-class, well-educated homeowners. Modern insurance policies have so many loopholes, co-payments and deductibles that a serious illness or injury can bankrupt even the insured.
Plus, many people who lost their jobs in the recent economic recession lost their health insurance as well.
Chapter 7 Personal Bankruptcy for Medical Debt
Chapter 7 personal bankruptcy liquidates all of your assets to pay your debts. In this case, medical bills are treated the same as credit cards and other forms of unsecured debt. They are completely discharged, or wiped out.
However, if you discharge your debts in Chapter 7 bankruptcy, you must wait eight years to file again. If your medical treatment is ongoing, you should wait until it is complete before filing for bankruptcy. You want to avoid new debt after bankruptcy.
Chapter 13 Personal Bankruptcy for Medical Debt
A Chapter 13 or “reorganization” bankruptcy does not erase your debts like Chapter 7, but instead creates a plan for repaying specific debts, sometimes at reduced rates, over a period of three to five years.
Secured debts like home mortgages and car loans are paid off first, followed by “priority” debt like federal and state taxes and child support. Unsecured debt (like medical bills) comes last. Any debt remaining after completion of the plan is usually discharged.
Alternatives to Bankruptcy for Medical Debt
Prior to filing for bankruptcy, medical debtors should work with their healthcare providers to negotiate discounts or forgiveness. Consumer groups are asking that hospitals limit bills to actual costs for the uninsured, delay sending the account to debt collectors, and consistently highlight charity and discount policies to all patients.
Debtors who have paid their medical bills using credit cards may qualify for a debt-management plan, which allows the cardholder to pay down the debt over time.
The Affordable Care Act
The Affordable Care Act (commonly known as Obamacare), which goes into effect in 2014, contains provisions that could lower the medical debt of many people and perhaps reduce the number of personal bankruptcies. However, the actual effects of the ACA won’t be seen right away.
A Bankruptcy Lawyer Can Help
The law surrounding medical bills and bankruptcy can be complicated, and the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a bankruptcy lawyer.
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