Medical bills, loss of income due to medical problems, rising health care costs and inadequate health insurance all contribute to the large number of bankruptcy filings attributed to medical issues. Medical bills are also a source of increased credit card debt as consumers use their credit cards to pay their medical expenses. Even people with health insurance can get buried by medical bills as a result of co-pays, uncovered services, and loss of income as a result of medical problems. Bankruptcy can be an effective way to get out from under a mountain of medical bills.
Medical Bills Are Unsecured Debt
Medical bills are usually unsecured debt. Unsecured debts are those that do not have collateral, meaning you have not given a creditor rights in your property to secure payment of the bill. Medical bills, credit cards and utility bills are all types of unsecured debt.
Secured debts are those where you have given rights in your property to the creditor to secure payment of the bill. Car loans and mortgages are the most common types of secured debts. With a secured debt, if you don’t pay, the creditor can take the property and sell it to get paid.
In a bankruptcy filing, unsecured debts are at the bottom of the ladder. They get paid last, do not get special treatment and can be discharged, or wiped out, in a bankruptcy filing.
Chapter 7 versus Chapter 13 Bankruptcy
A Chapter 7 bankruptcy is used to liquidate debt. In a Chapter 7, the court allows you to wipe away, or discharge, your debts when you don’t have money to pay them, or property that can be sold to pay your debts. You can file Chapter 7 when your income is low enough to pass a means test and you have no money left over, disposable income, to pay your debts after paying your reasonable living expenses. Your property can only be sold to pay your creditors if it can’t be exempted, or protected from the claims of creditors. A good bankruptcy attorney will be able to tell you if your property is exempt.
A Chapter 13 bankruptcy is to reorganize debt. In a Chapter 13, you pay your unsecured creditors part of what you owe them, but not all of it. Secured creditors get special treatment and priority creditors (such as child support and taxes), get paid in full. In Chapter 13, you get to keep all your property in exchange for a repayment plan that lasts from 3 to 5 years.
Since medical debt is unsecured debt, it can be wiped out in a Chapter 7 without any payment, no matter how much medical debt you have. In a Chapter 13, medical bills as unsecured debt receive partial payment, usually pennies on the dollar. At the end of your Chapter 13 case, any amount not repaid is discharged and you no longer owe it. The amount that gets paid to your unsecured creditors in a Chapter 13 depends on how much you can afford to pay and whether unsecured creditors would have received any payment if you had filed Chapter 7. A good bankruptcy attorney will be able to calculate you how much may have to repay.