Medical bills can pile up quickly when an unexpected illness strikes or an injury occurs. In fact, medical debt is often the reason for bankruptcy. In most cases, it can be wiped out (discharged) in Chapter 7 bankruptcy or after completing a three- to five-year Chapter 13 repayment plan.
Understanding Your Options
The bankruptcy chapter that you choose will affect how much medical debt you’ll have to pay.
Chapter 7 bankruptcy. In a Chapter 7 case, your debts get wiped away without paying into a payment plan. You’ll get to keep (exempt) a certain amount of assets. Anything that you can’t exempt will get sold by the bankruptcy trustee to pay your creditors. You’ll qualify if your income is low enough to pass a means test and if you have little disposable income (money left over after paying your necessary monthly expenses). Often called “straight bankruptcy,” this chapter works when you don’t have enough money to pay your debts and if you don’t have any (or much) property that can be sold to pay your creditors. (If your debt is high enough, however, it might be worthwhile to file even if you’ll lose some property.)
Chapter 13 bankruptcy. By filing a Chapter 13 bankruptcy—often called a “reorganization”—you tell the court and your creditors that you can afford to pay something back, but not all of what you owe. Although you’ll get to keep your property, you’ll pay your disposable income into a three- to five-year repayment plan. At the end of a Chapter 13 case, your dischargeable debt will get wiped out.
(For more information, read Choosing the Right Type of Bankruptcy: Chapter 7 or 13.)
Not All Debts Go Away
The status of your debt will determine its treatment in bankruptcy. Bankruptcy categories include priority, secured, and unsecured debt.
Priority debt. Priority debts usually don’t get wiped out. They also get paid before nonpriority debt. Examples include some taxes and child support or spousal support (things that are considered more important than other types of debt). If you file a Chapter 7 matter, you’ll be responsible for paying your priority debt (and a few nonpriority debts, such as student loans) after the case ends. In a Chapter 13 matter, you’ll have to pay your priority debts in full through your repayment plan.
Secured debt. Examples of secured debts include things like car loans and mortgages. The creditor retains a lien on the property (collateral). The lien gives the creditor the right to take it if you don’t pay. If you keep the property securing the debt, such as a car, you’ll have to pay what you owe.
Unsecured debt. A creditor holding an unsecured debt doesn’t have any collateral. Examples of unsecured debt include credit cards, medical bills, and student loans. (Student loans, however, are given special treatment in bankruptcy and aren’t dischargeable.) Unsecured, nonpriority debt is the last to get paid, it gets no special treatment, and is wiped out by bankruptcy (in most cases).
(Find out more by reading Understanding the Payment Priority of Debt in Bankruptcy.)
Wiping Out Medical Debt in Bankruptcy
In most cases, medical debt is nonpriority, unsecured debt. Medical debt won’t become secured (thereby giving your creditor a right to your property) unless the creditor sues you for the balance and a judgment lien gets placed on your property.
A Chapter 7 case wipes out all unsecured medical debt without any payment. The amount you’ll repay in a Chapter 13 case will depend on your overall financial circumstances (creditors are entitled to your disposable income and an amount equal to the nonexempt property that the trustee would have sold in a Chapter 7 bankruptcy). In many cases, the repayment amount will be pennies on the dollar. Any outstanding balance gets wiped out at the end of the repayment plan. A good bankruptcy attorney can calculate how much you’ll have to repay in a Chapter 13 case.
Questions for Your Attorney
- Can I file a Chapter 7 bankruptcy to wipe out my medical debt?
- If I file for Chapter 13 bankruptcy, how much of my medical debt will I have to repay?
- Will filing for bankruptcy get rid of my other debt, too?