There’s no such thing as a “medical bankruptcy,” but that doesn’t mean you can’t file for bankruptcy protection and discharge your medical bills. You have to include all your debts in your petition, not just hospital, doctor and other medical bills. You can’t list creditors whose debts you want to eliminate and leave other accounts, like credit cards you might want to keep, out of the proceedings.
Unsecured and Nonpriority Debts
The bankruptcy code classifies medical bills as unsecured debts because there’s no collateral the creditors can take if you don’t pay. Unsecured debts are further broken down into two categories: priority and nonpriority. Most priority debts aren’t dischargeable; they’re still there waiting for you and you still owe them when your bankruptcy is over. They include things like child support and taxes. Medical bills are not priority debts, so they’re dischargeable in both Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 and Medical Debts
An automatic stay goes into effect as soon as you file for bankruptcy protection, preventing creditors from doing anything to get you to pay what you owe. When you file for Chapter 7, creditors must immediately stop asking you for payment. The bankruptcy trustee takes control of your nonexempt assets and sells or liquidates them, giving the money to your creditors. Most debtors don’t lose much -- if any -- property, however. Exemptions remove assets up to a certain value from the proceedings so the trustee can’t sell them. If the trustee is unable to raise any money, your medical bills are discharged; because they're unsecured, nonpriority debts, the creditors don’t receive any payment. If you have some nonexempt property, the trustee will liquidate it and your creditors may receive pennies on the dollar. The balance of your debt is discharged.
Not everyone qualifies for Chapter 7 bankruptcy. You must pass a means test, establishing that you honestly can’t pay what you owe. Your income can’t exceed the median income in your state for a family of your size. If it does and if the court rules that you have enough disposable income to pay down at least some of your debt, you must file for Chapter 13 instead.
Medical Debt in Chapter 13
When you file for Chapter 13 protection, you give the trustee your disposable income each month after paying your regular living expenses. He uses this money to pay down your debts over a period of three to five years. The automatic stay remains in effect during this time. You continue to pay your secured creditors, such as your mortgage and car lenders, outside your bankruptcy repayment plan. Your payments to the trustee go toward your unsecured debts and arrears on secured accounts if you fell behind with any of them before you filed for bankruptcy.
As unsecured, nonpriority debts, your medical bills probably won’t be paid off in full through the payments you give the trustee. These creditors must receive at least as much as they would have if you had filed for Chapter 7 instead, but the remaining balances are discharged when your bankruptcy plan is over.
Limits to Unsecured Debts
There’s no limit to the amount of medical debt you can discharge if you file for Chapter 7, but Chapter 13 imposes a cap for how much unsecured debt you can have and still qualify: $383,175 as of the time of publication. This figure is adjusted periodically to keep up with inflation. If your medical debt is particularly high, you might not be eligible for Chapter 13, but if your income is also high, you wouldn’t be eligible for Chapter 7, either, because you wouldn’t pass the means test. If this is the case, speak with an attorney to explore your options.