Nearly 2 million Americans cannot afford paying their medical bills, making healthcare the No. 1 cause of such filings, and outpacing bankruptcies due to credit-card bills or unpaid mortgages, according to new data. Even with health insurance it doesn't buffer consumers against financial hardship. Data from U.S. Census, Centers for Disease Control, the federal court system and the Commonwealth Fund, a private foundation that promotes access, quality and efficiency in the health care system.
Question: I have accrued over $25,000 in medical bills that I cannot pay, and that's not counting the $12,000 I've already put on credit cards. If I file for bankruptcy, can I have my medical bills discharged?
Answer: Medical debt is one of the most common reasons people seek bankruptcy relief. Read on to learn more about how you can wipe out medical bills through bankruptcy.
How Are Medical Bills Treated in Bankruptcy?
When you file for bankruptcy, your debts are separated into different categories. Certain debts receive special priority treatment and can’t be eliminated through bankruptcy. Fortunately, medical debt is not one of them.
In bankruptcy, medical bills are considered general unsecured debts just like your credit cards. This means that medical bills don’t receive priority treatment and can easily be wiped out by filing for bankruptcy.
To learn more about how different types of debt are treated in bankruptcy, see Secured, Unsecured, and Priority Claims in Bankruptcy.
How to Eliminate Medical Bills With Bankruptcy
Depending on the type of bankruptcy you qualify for (or is in your best interest), you may be able to eliminate your medical obligations by filing for either Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
If you qualify for Chapter 7 bankruptcy, your discharge will wipe out your medical bills along with your other general unsecured debts. There is no limit to the amount of medical debt you can discharge in Chapter 7 bankruptcy. However, to qualify for a Chapter 7, your disposable income must be low enough to pass a means test.
How to qualify for Chapter 7, see below. *
Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, medical bills are lumped in with your other general unsecured debts in your repayment plan. The amount you must pay general unsecured creditors depends on your income, expenses, and nonexempt assets.
Each creditor then receives a pro rata portion of the total amount going towards these debts in your plan. This is typically only pennies on the dollar. However, keep in mind that you may not be eligible for Chapter 13 bankruptcy if your medical bills and other debts exceed the allowed Chapter 13 debt limits.
How do I qualify for Chapter 7 Bankruptcy?
The answer depends on whether your income is above or below your state’s median income level. Keep in mind that you must use the state median income for a household of the same size as yours. For example, if you are a family of three then you look at the median income for a family of three in your state.
Debtors With Below Median Incomes
If your average income for the six months prior to filing bankruptcy was below the median income of your state, then you automatically pass the means test and qualify to file a Chapter 7 bankruptcy. You do not need to fill out the rest of the means test form.
Debtors With Above Median Incomes
If your average income is above your state’s median income, then you do not automatically pass the means test. However, this does not mean that you automatically fail the test either. Instead, you must complete the entire means test form, which requires you to fill in figures for your expenses.
You must use IRS standard expense figures. Depending on where you live, the means test uses the national and local standards in your area for certain living expenses such as rent, utilities, food, gas, and clothing when determining your disposable income. This means that even if your actual expenses for these items are higher than the allowed standards, you cannot take advantage of them to minimize your disposable income.
You may use actual expense figures for some things. However, for some expenses such as your mortgage, car payment, taxes, health insurance, child care, and certain other items, you can deduct your actual expenses to pass the means test. For example, even if you are a high income debtor you may still pass the means test if you also have a big mortgage expense because you can deduct this amount in full from your income on the means test.
What If I Don’t Pass The Means Test?
If you do not pass the means test, you cannot file a Chapter 7 bankruptcy. However, you may still be able to take advantage of a Chapter 13 bankruptcy but you will likely have to pay a portion of your debts back.