Doctor Bankruptcies: Can You File Bankruptcy on Medical Bills? -Forbes | Vette Leader

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To say that health care costs a lot of dollars for Americans is to say that the nearest star is many miles away. Both are measured in trillions. According to the latest data from the Centers for Medicare & Medicaid Services, US healthcare spending reached $4.1 trillion in 2020. At the individual level, Americans spent $12,530 per person on medical care that year.

Health care costs are a significant concern for Americans and, in fact, a leading cause of personal bankruptcy. But filing for bankruptcy can be an effective way to reduce or eliminate overwhelming medical bills.

Medical Debt and Bankruptcy

Health care costs are a significant financial burden for many people. A 2021 Census Bureau study found that nearly one in five households (19%) could not afford medical care when it was needed. The Consumer Financial Protection Bureau reported in 2022 that medical debt was the most likely reason when debt collectors contacted consumers.

This close connection between ill health and financial problems leads to bankruptcy. The connection was notably made in a 2000 study which concluded that medical bills accounted for 40% of bankruptcy filings in the previous year.

That was years before the Affordable Care Act, but the Obamacare law’s expansion of health coverage doesn’t seem to make much of a difference. In a 2019 study of 910 Americans who filed for bankruptcy, two-thirds said their filings were linked to medical problems.

Why do an estimated 530,000 families seek protection from medical bill bankruptcy each year? The short answer is: because it works.

Can You Get Rid of Medical Debt in Bankruptcy?

There is no special procedure that allows applicants to settle only one type of debt. So you can potentially shed medical debt in bankruptcy, and all of your other debt can go away as well. It depends on the type of debt you have and the type of bankruptcy you are filing for.

Debt in bankruptcy is classified as ‘secured’ versus ‘unsecured’ and ‘senior’ versus ‘non-senior’. Secured debt is secured by some type of security, such as a car or home, while unsecured debt is not secured by an asset. Priority debts — including tax bills, student loans, child support and child support — are unsecured but given special status.

Medical bills are generally classified as non-senior unsecured debt, and they are a type of debt most likely to be settled or erased in bankruptcy. While relief is bad news for creditors, it can be great news for the borrower because it means the debt doesn’t have to be repaid.

Chapter 7 Bankruptcy and Medical Debt

Filing for Chapter 7 bankruptcy protection can help borrowers pay off debt, medical or otherwise. Chapter 7 is called liquidation bankruptcy.

In a Chapter 7 case, a trustee sells the debtor’s eligible assets to repay creditors. Some assets are exempt depending on the laws in the applicant’s state. The whole process takes four to six months. When it’s over, the applicant will likely be cleared of medical debt even if no money has been raised to pay healthcare providers. In fact, most Chapter 7 cases are “no assets,” where creditors get nothing — but the debt is still paid.

The disadvantage of Chapter 7 is that applicants may have to give up property, including their homes in some cases. Chapter 7 is intended only for individuals who do not have sufficient income to repay creditors.

To determine whether someone qualifies, the bankruptcy court applies a means test. Individuals who are employed and earn enough to repay creditors generally must file under Chapter 13.

Chapter 13 Bankruptcy and Medical Debt

In Chapter 13 bankruptcy, sometimes called a labor bankruptcy, debtors create a plan to repay their creditors over the course of three to five years. They use their disposable income to make payments, and sometimes medical bills need to be paid back as part of the process.

The upside is that filers may be able to maintain their relationships with healthcare providers if they pay back at least part of their bills. This can be important to a debtor’s future health and well-being.

Other ways to get rid of medical debt

If your only debt comes from medical bills, bankruptcy may not be the best choice. For one, bankruptcy takes a toll on your credit score: A Chapter 7 bankruptcy can linger on your credit reports for up to 10 years from the filing date, while a Chapter 13 bankruptcy can linger for up to seven years from the filing date. Bankruptcy is seen as a disparaging sign that can lower your credit score, although the effects wear off over time.

Many credit scoring models now ignore or give less weight to unpaid medical bills. And recently, the major credit bureaus agreed on several changes regarding medical debt.

Medical debt that was in collection but was paid off no longer appears on credit reports, and consumers have a one-year grace period before unpaid medical debt is listed. Medical debt of less than $500 does not show up on credit reports at all.

So you might consider avoiding bankruptcy and instead trying these options for dealing with high healthcare bills:

  • Negotiate with the medical provider. Hospitals and other providers can now take smaller amounts of cash instead of continuing with collection efforts whose outcome is uncertain.
  • Enter a debt management plan. An advisor from a nonprofit credit agency can help you create a debt management plan and negotiate with your creditors on your behalf. You may be able to extend the repayment period, lower your interest rate, eliminate fees, or otherwise make the repayment more manageable.
  • Consolidate your debt. You may be able to take out a low-interest personal loan or apply for one of the best 0% APR credit cards and use it to pay off your medical debt. These measures can give you some breathing room, but you need to create a plan to pay off your debt.
  • sell things. You could also sell some assets, like a boat or a second car, and pass the proceeds on to healthcare creditors. It is a kind of modified liquidation – without the oversight of the bankruptcy trustee.
  • To collect money. Crowdfunding is a new approach to dealing with medical debt by soliciting money from the public through an online platform. GoFundMe is especially popular with people raising money to pay medical bills. According to a study, GoFundMe campaigns have raised over $2 billion over a five-year period. It’s worth noting, however, that activists asked for four times that, or over $8.45 billion, and only a third of the campaigns met even half of their goal.

bottom line

Personal bankruptcy can be an effective way to get rid of crushing medical bills. However, this can come at a significant cost to your credit profile and potentially your relationships with doctors and other healthcare providers. Chapter 7 bankruptcy may require you to give up many of your possessions, while Chapter 13 means you commit to a year-long repayment plan.

However, if your personal money situation is vital because of medical bills, bankruptcy can present an opportunity to return to a healthy financial position.

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