This is a question that concerns far too many in our country as the cost of health care grows: Can you file bankruptcy on medical debt? If you have a lot of medical debt, you can file bankruptcy to discharge it. However, that doesn’t mean that you won’t pay on it, depending on the type of bankruptcy you file. You also have to consider what filing bankruptcy will do to your credit and how it could affect other assets. If your credit is low already, filing bankruptcy could be one of the best things you do. Once the court discharges the bankruptcy, it’s like starting over with no credit.
However, many creditors are more willing to extend credit after the court discharges the bankruptcy because they know that you do not have other liabilities and they will most likely get paid. You will end up with higher interest rates, but after you build your credit up again, the interest rates will drop – as long as you pay any new creditors on time.
If you have medical debt that is overwhelming you, contact a bankruptcy attorney at Jerry E. Smith, Attorney CPA, PC, for a consultation.
While there are several types of bankruptcy, the types that individuals file include Chapter 7, and Chapter 13. Once you file any type of bankruptcy, an “automatic stay” goes in place. This means that any court cases involving your assets, such as a foreclosure or an action where a creditor is trying to sue you, must be put on hold.
A creditor can ask the court for exemption from the automatic stay, but unless the court has been shown good reason, it rarely grants the creditor’s motion. For example, if you filed bankruptcy, then dropped it, then filed it again, and a creditor – for example, your mortgage company – complains, the court could remove the stay for that one creditor.
As long as the automatic stay is in place, a creditor cannot contact you for collections. If a creditor does contact you, advise it that you are in bankruptcy and to contact your bankruptcy lawyer.
Most people prefer to file Chapter 13, which is a reorganization, because they have a better chance of keeping their homes. However, you have to qualify for Chapter 13 – you have to have enough income to pay some of your bills.
Once you file Chapter 13, you will have to attend a credit counseling course and a 341 meeting, or a meeting of creditors. Your appearance is mandatory at both events. At the 341 meeting, you will need to prove your identity, so be ready with your identification.
You also have to file a Chapter 13 Plan. The plan lists all of your liabilities in the order that they get paid according to Chapter 13 bankruptcy laws. Taxes, judgments and secured loans all get paid prior to medical expenses.
Using your financial affidavit, your attorney creates a plan with the amount you can afford to pay to the bankruptcy trustee every month. The trustee disburses that amount to your creditors in the order dictated by the plan.
If there is not enough money to pay unsecured bills, such as medical bills, the medical provider might get a little from the plan, but they could also get no money.
It takes three to five years to finish a Chapter 13 bankruptcy. Once you complete the bankruptcy, the court discharges it. The creditors that received little to no money have to wipe the debt out.
If you cannot qualify for Chapter 13 – you do not have enough income – you must file Chapter 7. Filing Chapter 7 liquidates all of your assets to pay your bills. In some cases, you might be able to keep your home. Your bankruptcy lawyer will discuss what exemptions you have. The exemptions are considerably less than the exemption you get if you file Chapter 13.
Unlike Chapter 13, Chapter 7 could take a few months or even over a year, but it rarely takes longer than two years unless your house does not sell in that time and you have to include your home in the bankruptcy.
After everything sells, the bankruptcy trustee forwards the money collected from secured assets to pay down those liabilities. Other monies collected from selling unsecured assets pay past-due taxes, judgments and unsecured debts.
As with Chapter 13, you also have to take a credit counseling course. However, you do not file a Plan. The trustee handles the sale of the assets and payments to the creditors.
Your bankruptcy attorney will review your circumstances with you, including your income, assets, and liabilities, and let you know which method of filing is best for your situation. In some cases, the attorney might file a Chapter 13, but if the Means Test dictates that you do not qualify, you can convert Chapter 13 to Chapter 7.
You can contact the medical provider and ask if it has any programs available to help you pay your debt. You can also “settle” with the medical provider by making payment arrangements. However, the medical debt will most likely show up on your credit report. You can ask if they will remove any negative credit reporting and give you a “Paid on time” rating when you have finished paying the bill.
If your medical bills are astronomical, you could consider filing bankruptcy to discharge the debt. This option will not only have negative credit ratings from the medical provider, but it will also have a negative rating for having a bankruptcy.
You will have to pay the filing fee, which is different for each type of bankruptcy. The filing fee is mandated by federal statutes. You will also have to pay your attorney his fee for filing the bankruptcy for you. Your attorney will discuss his fee during your initial consultation.
If you cannot afford to file bankruptcy, you can sometimes add the bankruptcy filing fee in the Chapter 13 Plan or ask the court for indigent status. In some cases, you can also include the attorney’s fee in the Chapter 13 Plan.
As of May 2021, the filing fees are as follows:
Keep in mind that the filing fees can change at any time if the statute changes.
If you do not pay your medical debt, the medical provider will report you to one or more credit bureaus. The medical provider could also file a lawsuit against you in an attempt to collect the debt.
It may also call you at home or work unless you tell the medical provider not to call you. The medical provider could also turn your account over to a collection agency.
A medical provider can put a lien on your home. In essence, it is the same as losing your home if you do not have enough equity in the house to pay the mortgage off and pay the outstanding medical expenses named in the lien. You will not receive any funds from selling your home. However, a medical provider cannot seize your home because of a bad medical debt.
The medical provider could also obtain a judgment against you if it takes you to court. As with a lien, you would have to pay it from the proceeds of your home if you sell your home. If you are able to pay off the medical debt and you have a lien or a judgment, be sure that the medical provider files a satisfaction of the lien or judgment.
Most unpaid medical bills drop off your credit report in seven years. There are always exceptions to the rule. For example, because of the Covid pandemic, some credit reporting agencies remove the debt if you can pay it off in 180 days. Otherwise, the medical debt remains on your credit report for seven years.
If you otherwise have good credit and you are able to pay all of your other bills, and you can pay off the medical bills in about a year, you might try to tighten your belt a little to pay off the medical bills – just to keep a good credit rating, or to minimize any damage you might have already done to your credit.
Before you make that decision, pull your credit report from all three credit bureaus. Sometimes, if a medical provider has not forwarded your account to a collection agency, it might not have reported any late payments.
If that is the case, contact the medical provider immediately to work out a deal to pay the medical bills without damaging your credit.
Yes. You can file bankruptcy without adding your spouse to the bankruptcy. However, if the medical debt is in both names, which is unusual, your spouse will also have to file bankruptcy. When you come in for a consultation, be sure to discuss your options with your bankruptcy attorney. You should know which liabilities are in both names for the attorney to advise you properly.
If you need to file bankruptcy to get out from under medical bills, contact bankruptcy attorney Jerry E. Smith by calling (317) 917-8680 for a bankruptcy consultation. As both an attorney and a CPA, he’ll bring to your case strong qualifications and experience to help you get a fresh start and to move forward with your life.