There’s a battle of experts underway about just how often medical bills and lost income due to an illness or injury triggers a bankruptcy filing. Some studies conclude that as many as ⅔ of all bankruptcy filings are due at least in part to medical problems, while others contend the number is much smaller.
If you’re one of the many Americans who is struggling with medical debt, you probably don’t care much about the percentages. The more important question is “What can I do about this overwhelming medical debt?” While many people are uncertain whether or not medical bills can be included in bankruptcy, the answer is a clear “yes.” And, it doesn’t matter whether they’re old or new, large or small, or in the hands of the original creditor or an outside collection agency.
How those bills are treated will depend on whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy.
Medical Debt in Alabama
According to data from the Urban Institute, 21% of Alabama households have at least one medical bill in collections. Both Jefferson and Montgomery counties are close to the average, at 21% and 23%. But, in some Alabama counties, about one in three households has medical debt in collections.
Medical debt is generally not reported to credit until it is six months past due. But, past-due medical bills are otherwise just like any other debts in collections. The creditor or a collection agency may call you repeatedly, send threatening letters, pressure you to make payments you can’t afford, and eventually file suit to collect on the unpaid balance. So, it’s in your best interest not to ignore past-due medical bills. If you are unable to reach an affordable agreement with the provider or collection agency, it’s wise to explore other options before reaching a crisis point.
What Happens to Medical Debt in Bankruptcy?
Medical debt is treated differently in a Chapter 7 bankruptcy case than in a Chapter 13 case. But, the two types of bankruptcy have some things in common. For instance, in most consumer bankruptcy cases under both chapters, an automatic stay is entered as soon as the case is filed. The automatic stay is a court order that temporarily stops collection action. So, a bankruptcy filing can usually stop collection proceedings immediately, even if a lawsuit is already underway.
Medical Debt in Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy case, medical debt–like most unsecured debt, can typically be discharged. That means that the final order in the bankruptcy case frees you from the obligation to pay that debt. The discharge order also prohibits creditors and debt collectors from trying to get you to pay that debt in the future.
For many people who are buried in medical bills, Chapter 7 provides the quickest and most complete solution. There is no limit on the amount of unsecured debt that can be discharged in a Chapter 7 case. In most cases, the automatic stay stops collection efforts as soon as the bankruptcy petition is filed and continues in effect until discharge. In a straightforward Chapter 7 case, medical bills and many other unsecured debts could be discharged in as little as four to five months.
However, Chapter 7 isn’t the right answer for everyone. Some common reasons people opt not to file under Chapter 7 include:
- They earn too much money to qualify for Chapter 7 bankruptcy
- They also want to manage secured debts through the bankruptcy–something a Chapter 13 plan offers but a Chapter 7 case does not
- They have non-exempt property that they want to keep
In addition to these common reasons not to opt for Chapter 7, some reasons are unique to individuals. Having practiced bankruptcy law for over thirty years, I know that there is no “common” person with money problems. All of our clients are unique, and all have different needs and desires. For instance, I am always hesitant to file a Chapter 7 bankruptcy for someone who will remain on a tight budget following their bankruptcy and who may have financial problems again in the near future. You see, an individual is only entitled to a Chapter 7 discharge once every eight years. So, if an individual who may not have healthcare insurance coverage comes to me because of overwhelming medical debt and I help them file a chapter 7 bankruptcy, what happens if they get sick or injured again shortly thereafter? I can’t help them with another Chapter 7 bankruptcy for another 8 years. But if they have filed a Chapter 13 bankruptcy, I may be able to modify their repayment plan or convert their case to one under Chapter 7 at that time. Each of our clients is unique and there is no one cookie cutter approach for all.
If you’re considering bankruptcy to manage medical debt, an experienced local bankruptcy attorney can be your best resource. When you schedule a free consultation with a Bond & Botes attorney, we’ll explain your options and the pros and cons of each so you can make an educated decision about the best solution for you.
Medical Debt in Chapter 13 Bankruptcy
Chapter 13 bankruptcy isn’t designed for quick elimination of debts like Chapter 7 is. However, depending on your income, expenses and other debts, some or all of your unsecured debt may be discharged in a Chapter 13 case.
In a Chapter 13 case, you’ll make monthly payments for three to five years. In the repayment plan, certain types of debts get priority. Others, including many unsecured debts like medical bills, get lower priority. Funds are only allocated to pay those lower priority debts when the higher priority debts are covered.
In some cases, that means that unsecured creditors like medical providers and collection agencies pursuing medical debt will be paid only a fraction of the amount due, and the remainder will be discharged if you successfully complete the plan. In some cases, there is no money left after paying secured creditors and higher-priority unsecured creditors, and debts like credit card accounts and medical bills are discharged entirely.
Conquering Medical Debt in Alabama
The first step toward solving any problem is educating yourself about the options. Before you consider financially risky options like taking out a home equity loan to pay off medical bills or paying them with credit cards, take the time to learn more about longer-term solutions.
You can start right now by scheduling a free consultation with one of the experienced bankruptcy attorneys at Bond & Botes. Just call 877-581-3396 or fill out the contact form on this site.
Brad Botes is a principal of each of the Bond & Botes Law Offices throughout Alabama, Mississippi, and Tennessee. He holds a Bachelor of Science from the University of North Alabama, and a Juris Doctorate from Cumberland School of Law at Samford University. He and his team of bankruptcy lawyers have spent over 30 years guiding people through financial challenges. Read his full bio here.