Medical Debt in Chapter 7 Bankruptcy
The rising cost of health care and the growing number of Americans without adequate health insurance coverage has led many people to file Chapter 7 bankruptcy to eliminate their medical debts. Read on to learn more about how medical debts are treated in Chapter 7 bankruptcy and how you can wipe them out.
Classification of Debts in Chapter 7 Bankruptcy
Not all debts are treated the same in bankruptcy because Congress has decided that certain debts are more important than others. As a result, how bankruptcy affects a particular debt depends on what kind of a debt it is.
A creditor has a secured debt if it has a lien on your property and can repossess or foreclose on it if you fail to make your loan payments. This is because the debt is deemed to be secured by the property that acts as collateral. The most common examples include your mortgage and car loans. Medical debts are normally not secured by any property so they are not considered secured debts.
Any debt that is not secured by a piece of property is an unsecured debt. Unsecured debts are further divided into priority and nonpriority categories.
Priority debts are usually non-dischargeable (they cannot be wiped out by bankruptcy) and get paid before most other debts in Chapter 7 bankruptcy. Examples of priority debts include certain taxes and domestic support obligations such as alimony or child support. However, medical debts are not included this category.
Nonpriority General Unsecured Debts
Nonpriority general unsecured debts receive no special treatment and are the last to get paid in Chapter 7 bankruptcy. Most nonpriority unsecured debts (with a few exceptions like student loans) are discharged without any repayment in bankruptcy. These debts include credit cards, unsecured personal loans, and medical debts.
How Is Medical Debt Treated in Chapter 7 Bankruptcy?
As discussed above, medical debt is treated as a nonpriority unsecured debt in your Chapter 7 bankruptcy. This means that your medical debts will not receive priority if the trustee is able to make any payments to your creditors. Even if a portion of your medical debt is paid through your bankruptcy, the remainder will be wiped out when you receive your discharge. So if you are struggling with large amounts of medical debt, a Chapter 7 bankruptcy may be your easiest and best option to relieve this burden.
Are There Limitations on Discharging Medical Debt in Chapter 7?
There is no limit or cap on how much medical debt you can discharge in a Chapter 7 bankruptcy.
However, you must still qualify for a Chapter 7 bankruptcy. In order to qualify for a Chapter 7, your income must be low enough to pass a disposable income means test. Further, even if you pass the means test, filing a Chapter 7 may not be in your best interest if you have a significant amount of assets you can t exempt. (To learn more about Chapter 7 bankruptcy and the means test, see our Chapter 7 Bankruptcy area. To figure out if filing for Chapter 7 is good option for you, check out our Should I File for Bankruptcy? area.)