Uninsured individuals often file for bankruptcy to get out from under medical expenses. But they’re not the only people buried by medical debt. Even people with health insurance struggle to pay for high co-pays and uncovered services, especially if they lose income as a result of being unable to work. It’s not surprising that a large number of bankruptcy filings are due to medical issues (however, in recent years, as the number of insured individuals has increased, the number of medical filings has dropped sharply).
Not all debt gets wiped out (discharged) in bankruptcy—but medical debt does. Not only is it an “unsecured debt” (an obligation that’s not backed by collateral), much like credit card debt and personal loans, it isn’t entitled to any special, or “priority” treatment that would allow it to be paid before other debt. So even if money is available to pay creditors in a bankruptcy case, medical bills fall last on the payment list and in most cases will be forgiven entirety.
What will happen to your medical debt will depend on some factors, however, the first of which is the type of bankruptcy chapter you file.
A Chapter 7 bankruptcy forgives debt without requiring the filer to pay any portion back to the creditor over time. You can file Chapter 7 bankruptcy when your income is low enough to pass a means test. Passing tells the court that you don’t have disposable income to pay your debts after paying your reasonable living expenses. Also, your property can only be sold to pay your creditors if it can’t be exempted, or protected from the claims of creditors. Most people can keep all or the majority of their property in a Chapter 7 case.
All of your medical debt can be wiped out in both a Chapter 7 bankruptcy and a Chapter 13. In a Chapter 7 bankruptcy, if you have a no-asset case (no money is available for creditors), nothing will be paid on the medical debt. Even if some of your property gets sold, the funds will rarely be used to pay medical bills because higher priority debt, such as past-due support obligations and income tax, get paid first.
A Chapter 13 bankruptcy is for high-income earners who have some money to repay debt, but not enough to meet monthly obligations. In Chapter 13 bankruptcy, you pay your unsecured creditors at least part of what you owe them. You keep all of your property in a Chapter 13 case, but you must pay the value of your nonexempt property in a three to five-year repayment plan. You also must pay your monthly disposable income to your creditors during that time.
Bill payment in a Chapter 13 case follows the same structure as a chapter 7 bankruptcy—medical bills are last in the payment hierarchy. The bulk of your plan payment will likely go toward mortgage and car payment arrearages, and past-due support and tax obligations. Your unsecured creditors, including medical providers, will receive a pro rata portion of whatever is left. “Paying pennies on the dollar in Chapter 13 bankruptcy” is a catchphrase that refers to the tiny amount that gets paid to unsecured creditors. (Keep in mind that debtors with significant income or assets could have to repay all debt in what’s known as a 100% plan.) Any medical bill balance remaining after making all of your payments will be forgiven when you receive the discharge order.
To learn about your options under both bankruptcy chapters, including whether you’d be able to protect all of your property in a Chapter 7 bankruptcy and how much you’d pay in a Chapter 13 repayment plan, speak with a knowledgeable bankruptcy attorney.