When medical debt becomes unmanageable, it can be recipe for financial ruin. But can you file bankruptcy on medical bills?
Medical Debt Is a Leading Factor in Bankruptcy Filings
Medical emergencies can happen to anyone and without warning, leaving you in a situation where you’re out of work, bills are piling up, and you have thousands of dollars in medical expenses. You’re looking for a job, but your health is still recovering. What happens when you can’t pay your debt? Medical debt accounts for the majority of bankruptcies.
What Happens When I Have Outstanding Medical Debt?
Outstanding medical debt will immediately go into collections. Once that happens, you can expect to receive phone call after phone call until the debt is paid. With the help of a collections attorney, the primary creditor can initiate several collections actions against you. These include:
- Placing liens on your property;
- Garnishing your wages; and
- Levying your bank account.
In other words, they can take their money by force, if necessary. To do this, they must first file a lawsuit and receive a judgment against you. The court will notify you that this action has been taken.
The bankruptcy process will prevent the creditor from garnishing your wages or taking other aggressive actions. In essence, the moment you file for bankruptcy, all creditor actions against you must stop immediately.
How Is Medical Debt Treated in Bankruptcy?
In bankruptcy, medical debt is treated as an unsecured debt. Similar to credit card debt, unsecured debt is unlike your car loan or mortgage in that it is not backed by tangible property.
So what does this mean? It means that medical bills can be discharged entirely in Chapter 7 bankruptcy. Some types of debts are given special priority treatment and can’t be eliminated in bankruptcy — but medical debt is not one of them.
A Dallas bankruptcy attorney can help you determine whether filing Chapter 7 or Chapter 13 is best for your situation.
Eliminating Medical Debt in Chapter 7 Bankruptcy
Chapter 7 is known as liquidation bankruptcy. In the process of filing, your most valuable assets become part of a bankruptcy estate. These assets are then liquidated to repay a portion of your debts. You can protect assets up to a certain amount of value.
Texas has some of the most permissive protection statutes of any state in the country. Chances are the bankruptcy trustee will not find anything to liquidate. In other words, your debt will be wiped clean and you will be free to rebuild your credit over the next few years.
Eliminating Medical Debt in Chapter 13 Bankruptcy
Chapter 13 bankruptcy is known as reorganization bankruptcy. All of your debts will be consolidated into one monthly payment. The amount you will have to pay will be determined by what is within you means, taking into account your income and expenses. You make this payment over the course of three or five years, and at the end of that period, your debts are discharged.
Chapter 7 vs. Chapter 13 for Medical Debts
In order to qualify for either Chapter 7 or Chapter 13, you must meet specific requirements.
To qualify for Chapter 7, you must make below the state median. In Texas, that is around $60,000 a household. Those who make below this number can automatically qualify for Chapter 7. Those make above this number will be required to take the means test. The means test is a survey of your financial obligations versus your income. If it is determined that you have enough disposable income to repay some of your debts, you will still qualify for Chapter 13.
In Chapter 13, there is a limit on how much money you owe. As of April 1, 2019, the total amount of unsecured debt you can owe and still qualify is $419,275.
What happens if you make too much money for Chapter 7 and owe too much money for Chapter 13? Can you file bankruptcy on medical bills even in this situation? Yes, but you would have to file under Chapter 11.
What If I Qualify for Both?
There are pros and cons for filing either Chapter 7 or Chapter 13. Most people tend to choose Chapter 7. Chapter 13 bankruptcy is more expensive and, while it will eliminate all qualifying debt, you will have to repay your debt.
However, the negative impact on your credit score for filing under Chapter 7 are more severe than they are for Chapter 13. In Chapter 13 bankruptcy, the bankruptcy stays on your credit report for seven years. In Chapter 7, it will appear on your bankruptcy report for ten years. But for a number of reasons, that penalty isn’t as bad as it sounds.
In most cases, you will be able to begin rebuilding your credit immediately. Over the next few years, you will start seeing major improvements to your credit score. In fact, with the right choices, your credit score will be higher than it is now, even with the bankruptcy.
A Dallas Bankruptcy Attorney Can Help You Understand Your Options
Can you file a bankruptcy on medical bills? With the help of a Dallas bankruptcy attorney, you can wipe the slate clean and move forward with a fresh financial start. If you’re mired in debt due to medical expenses, call Allmand Law Firm, PLLC today to learn more about your options.