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Can a Medical Bankruptcy Wipe Out Your Healthcare Debt?

If you, your spouse, or a minor child has recently suffered a serious medical issue that required a lengthy hospitalization or stay in a physical rehabilitation facility, you may be cringing at the bills you now receive on what seems like a daily basis or even refusing to open your mail entirely. For those unfortunate enough to have sought treatment from an out-of-network provider or who don't have health insurance, the cost of a long stay in the hospital can be six or even seven figures. What should you do if you're hit with medical bills you can't possibly pay? Read on to learn more about when a bankruptcy can (and can't) help you dig out from under the burden of tremendous medical debt.

When may bankruptcy be possible (and necessary) to get rid of medical debt?

There are two types of bankruptcy that may be able to help you: a Chapter 7 discharge or a Chapter 13 repayment plan. In some cases, you may want to start with a Chapter 13 that can be converted to a Chapter 7 if your financial circumstances change, while in other situations, a straight Chapter 7 is your best bet.

A Chapter 13 plan will allow you to consolidate and reorganize your debts, paying them off with the help of a bankruptcy trustee to negotiate on your behalf. When you file for bankruptcy, the trustee will gather information about all your assets (including your regular income) and debt, prioritizing your debt by type and amount. You'll then be given a monthly budget for items that aren't connected to your debt load (like groceries, utilities, and transportation costs). Any funds you earn over and above the amount needed for these necessities will be turned over to the trustee so that he or she can distribute funds to your creditors. 

Once you've completed this repayment plan, which generally requires you to stay current on any secured debt and fully pay (or have discharged) any unsecured debt like medical bills, your bankruptcy case will be dismissed and you'll be able to go forward with a fresh start. Although this type of bankruptcy can have a negative impact on your credit, this effect is often shorter-lived than a Chapter 7 bankruptcy (and much shorter lived than the credit damage from years of battling collection notices).

A Chapter 13 is generally the best idea if you have a moderate to high income compared to your medical debts but just can't seem to get ahead of your debt.

Another option is a Chapter 7 bankruptcy. This type of bankruptcy doesn't require you to repay your debts, but instead will discharge any unsecured debt (like credit cards or medical bills) and allow you to either reaffirm the secured debt or choose to give up the asset securing it. A Chapter 7 bankruptcy can be the best choice if your income is relatively low or if your medical bills are so extensive there's no way you could reasonably repay them within the next decade or two.

When is bankruptcy not the best option?

Those at certain income levels are often barred from bankruptcy. For example, if you're seeking a Chapter 7, your household income will need to be at or below the median income for your state. Although it's not impossible to obtain a Chapter 7 discharge if your income is above these limits, the bankruptcy court will need to take a closer look at your assets, income potential, and debt load. 

Similarly, those who have ultra-high incomes or protected assets like 401(k) accounts may have more trouble securing a repayment plan under Chapter 13. Unfortunately, if you fail to complete your Chapter 13 plan successfully and earn too much money to qualify for a Chapter 7, you'll be stuck with your remaining debt and will have to take a hit on your credit report. 

As a result, it's important to have a clear picture of your finances before you pursue bankruptcy. You may want to consult with an attorney to determine the best way to remove the millstone of medical debt and gain a fresh start.