The U.S. healthcare system stands in stark contrast to many other countries, where a significant portion of medical expenses is covered. In America, even individuals with good health insurance may face tens of thousands of dollars in out-of-pocket costs for medications, major procedures, or hospital stays.
Medical debt can quickly mount, and many Americans struggle to repay it. One thing to understand is that medical debt is treated slightly differently for bankruptcy purposes. There are two types of bankruptcy that consumers usually file — Chapter 7 and Chapter 13. Chapter 13 is a reorganization or payment plan bankruptcy that is based on secured debts and disposable income. The payment plan is between three and five years. Chapter 7 is a liquidation bankruptcy, which involves a full discharge of most debts.
Chapter 13 bankruptcy, on the other hand, is designed for individuals who have a regular income and can repay a portion of their debts over time. It’s often a viable option for those who do not qualify for Chapter 7 but still need structured debt relief.
Chapter 7 is usually the preferred bankruptcy but there are income limits. A person is eligible for Chapter 7 if they pass a means test, which is based on their income. However, if a person’s debts are not primarily consumer debts, then they don’t have to pass the means test. Medical debt is not considered a consumer debt. Therefore, if someone has substantial medical debt, they may qualify for Chapter 7 bankruptcy.
Chapter 7 bankruptcy offers various protections under the bankruptcy code. An automatic stay goes into place, and this protects consumers from creditor harassment. This means all phone calls, letters, and other collection efforts must cease. Once the discharge is entered, the medical debt will likely be wiped out
However, not everyone needs to settle medical debt or file for bankruptcy. If you do not have income or property your creditors can take, and your financial situation is not going to improve, you are likely “judgment proof.” You have nothing of value that creditors can take, so you are protected from creditor actions. There would be no need to file for bankruptcy.
Laws to Alleviate Medical Debt
There are several laws in place to help with medical debt and possibly not force you to file for bankruptcy. They include:
- The No Surprises Act. Effective January 1, 2022, this legislation protects against surprise bills from out-of-network providers. The goal is to increase transparency in billing practices from medical providers.
- The Medical Debt Relief Act. This proposed federal legislation focuses on mitigating the long-term impact of medical debt on credit reports. This act aims to alleviate the long-term financial consequences of medical expenses.
- State-level reforms. Various states have enacted numerous bills and other legislation regarding medical debt. For example, North Carolina limits interest rates that can be applied. In New York, there are shorter statute of limitations on medical debt collection.
Medical Debt Can Be Resolved
Medical debt does not have to equal bankruptcy. Many states have laws and various reforms in place to alleviate debt.
Consulting with a bankruptcy specialist is crucial when navigating the complexities of financial distress due to medical debt. Bankruptcy law is intricate, and making uninformed decisions can lead to lasting consequences, including asset loss, damaged credit, and even legal complications. A bankruptcy specialist is well-versed in the different chapters of bankruptcy, such as Chapter 7, Chapter 11, or Chapter 13, and can assess which option is most suitable for your unique situation.
Filing for bankruptcy is not just about submitting paperwork; it requires a deep understanding of exemptions, debts that can and cannot be discharged, and how bankruptcy affects various assets like your home, retirement funds, or business interests.
A specialist can guide you through the entire process, from the initial consultation to post-bankruptcy credit rebuilding strategies, ensuring that you maximize protections under the law while minimizing risk.
Moreover, bankruptcy attorneys often provide a fresh perspective on alternatives, such as debt restructuring, negotiation with creditors, or financial planning to avoid the bankruptcy process altogether. Without expert guidance, individuals and businesses may overlook these options, missing opportunities to resolve financial issues in a less drastic way.
In short, consulting with a bankruptcy specialist ensures that you make informed decisions, protecting your financial future and minimizing the stress of an already challenging situation.