Being overwhelmed with debts is no fun --- particularly when that debt is compounded by medical issues. A recent study by Harvard University found that as many as 46 percent of personal bankruptcies had medical debt as a contributing factor. Not all debts are dischargeable in bankruptcy. But as long as there was no evidence of fraud, and the creditor is not the federal government, bankruptcy can potentially discharge medical debts. Whether filing bankruptcy is worth it or not, however, is another matter altogether.
Liquidation Versus Reorganization
Bankruptcies has two types for individual filers: liquidation and reorganization. Liquidation is governed by Chapter 7 of the U.S. bankruptcy code. In a Chapter 7 proceeding, the court takes charge of all of a person's assets --- minus a limited amount, called an exemption, that the filer is allowed to keep with which to start over. Normally, debts that cannot be satisfied by the sale of the assets are cleared, or discharged, by the courts. In a Chapter 13 proceeding, the filer pays off at least a substantial part of the debt over time. Collection efforts cease as long as the individual is complying with the terms of the bankruptcy.
Dischargeable Versus Non-dischargeable
Not all debts are dischargeable via the bankrupcty process. For example, you cannot go bankrupt on amounts you owe in court-ordered child support payments, nor on federally guaranteed student loans, nor on most tax debt less than three years old. You also cannot discharge debts fraudulently incurred or debts you deliberately ran up knowing you would shortly be filing bankruptcy.
Medical Debts
In most cases, medical debts are owed to a private creditor, such as a doctor, clinic or hospital. In these cases, medical debts are no different than any other debts --- they are typically unsecured debts and therefore receive a fairly low priority under the bankruptcy code. If you file a Chapter 7 bankruptcy, you will lose all but a limited amount of your personal assets, but you may be able to clear the medical debt. However, you cannot bankrupt out of debts you owe to the Medicaid system. If you have substantial assets, and the government has paid Medicaid benefits on your behalf, under clawback rules, the state will typically become the first position lienholder on personal assets sufficient to satisfy the debt.
Chapter 7 Versus Chapter 13
The chances of a full debt discharge is highest under Chapter 7, though you will typically not be allowed to keep much. State laws vary, but you will typically be reduced to a few thousand dollars in personal wealth, a modest car, personal clothing and books and tools and books used in the pursuit of your trade, up to a certain amount. However, Chapter 7 can be difficult to qualify for. If you earn more than the median income in your state for a family of comparable size to yours, the court may disallow your Chapter 7 filing, forcing you to file under Chapter 13 instead. However, Chapter 13 may enable you to create a payment plan that enables you to pay the medical debt, along with everything else, without having your assets liquidated by the court.
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