What are medical bankruptcies?
There is no official legal term or chapter dedicated to medical bankruptcies, but they are still a concern for many American households. According to Kaiser Health, a nonprofit news organization dedicated to healthcare policy, 20 percent of Americans claim they would have trouble paying an unexpected $500 medical bill. Add in the fact that medical expenses are on the rise, increasing by 33 percent since 2008, and it’s easy to see why medical bankruptcies are so common.
What is a medical bankruptcy, though? Although there isn’t a stated definition, if medical expenses are the stated reason for filing bankruptcy, it’s considered a medical bankruptcy.
Several studies have looked into the frequency of medical bankruptcy filings, but their estimates range from four percent of all bankruptcies to 50 percent. In 2018, close to 757,000 individuals filed for bankruptcy, so even at the low end, that’s approximately 30,000 people citing medical expenses as the primary cause of bankruptcy.
How is medical debt treated by bankruptcy courts?
Medical debt is among the easier debts to discharge during bankruptcy. That’s because it is an unsecured debt, and is categorized with other unsecured debts. Why is this important for debtors? Because unsecured debts are considered low priority.
The bankruptcy process prioritizes certain debtors over others. Priority debts include things like spousal and child support, employee wages and recent tax debts. When assets are liquidated or payments made, the money first goes to these priority debts.
Once the priority debts are satisfied, the next priority is the secured debt. Secured debt includes any debt that is guaranteed with collateral. Most secured debts involve a home or a vehicle, and if the debtor fails to pay them back, creditors can start foreclosure or repossession proceedings. Some debtors prefer to pay back their secured debts in full to keep the property, while others would rather give the property back rather than continue making payments.
Unsecured debt is the last in line, and in many cases, only a fraction of it is paid back before the rest is discharged. Debtors usually don’t have much left over after paying priority and secured debts, so only a small portion is guaranteed to creditors.
Because medical debt is an unsecured debt, most debtors will only have to pay a small portion back before they are free of the rest.
Debtors Do Not File “Medical” Bankruptcy
Bankruptcy doesn’t allow debtors to pick and choose which debts they would like to discharge, so there is no functional difference between a medical bankruptcy and any other bankruptcy. When a debtor files a bankruptcy petition, they must provide a full picture of their assets, debts and income, regardless of the stated cause for filing. Even if medical debts are the primary reason for a debtor’s financial issues, all of their finances will be taken into consideration by the court, the appointed trustee and creditors.
Chapter 7 or Chapter 13?
Most individuals choose either Chapter 7 or Chapter 13 when filing for bankruptcy. Both are effective options for people struggling with medical debt, and the right choice depends on the debtor’s goals and financial situation.
- Chapter 7 – Chapter 7 is termed “liquidation,” and involves the sale of the debtor’s nonexempt assets, through an appointed trustee. The cash generated from those sales is used to pay back creditors, with priority and secured debts being addressed first. Chapter 7 is the fastest form of bankruptcy, with most cases resolving within six months.Debtors can exempt much, even all, of their property from sale using either the federal or their state’s list of exemptions. If the debtor doesn’t possess many assets, they may have nothing for the trustee to sell. This is extremely common, and according to the National Association of Bankruptcy Trustees, happens in at least 90 percent of all Chapter 7 cases.
Whether the trustee finds assets to sell or not, once the creditors are paid back as much as they can be, the Chapter 7 case is concluded and most remaining debts are discharged. Some debts, like student loans, do remain following Chapter 7, but medical debts are almost always discharged in full.
Debtors do have to qualify for Chapter 7, with the means test representing the biggest obstacle for most. During the means test, the debtor must prove that their income is lower than the state median or that their financial situation is difficult enough to merit qualification.
- Chapter 13 – Chapter 13 is what most individuals choose when their income is too high to qualify for Chapter 7. Also known as the wage-earner’s bankruptcy, Chapter 13 does not involve liquidation. Instead, the debtor authors and presents a repayment plan that resolves over three to five years. In the repayment plan, the debtor must detail how they intend on paying back creditors, and how much each creditor will receive. Repayment plans must fully pay back priority debts and secured debts, unless the debtor wishes to relinquish secured property.Unsecured debts, again, are last to be addressed in a Chapter 13 repayment plan. How much unsecured creditors receive depends on the debtor’s income and debt. In almost all instances, unsecured debts like medical debts are only paid back partially. Once the repayment plan’s terms are met, the remaining unsecured debts are discharged, much like they are in Chapter 7.
Medical debt is something millions of Americans struggle with, and many turn to bankruptcy to help resolve it. Fortunately, the two most popular forms of bankruptcy for individuals – Chapter 7 and Chapter 13 – do eliminate medical debt, as long as the process is properly follow. A debt relief attorney ensures that is the case, as they inform, prepare and guide their client through bankruptcy.