What Is Medical Bankruptcy?
When people talk about consumer debt, it is easy to conclude that shopping sprees cause it. Or maybe living beyond your means and bad financial habits. But do you know that medical debt is one of the leading causes of financial ruin today? According to Kaiser Family Foundation (KFF), more than 25% of Americans find paying their medical bills a considerable challenge. From a study from the same organization, 9% of people in America had declared bankruptcy because of medical bills.
Medical bankruptcy is not an actual term, but is often the cause of a medical hardship. In general, there is no such thing as a medical bankruptcy. Most people are unaware that filing for medical bankruptcy does not limit the bankruptcy to pending medical bills only.
Medical debts fall into the same category as credit card debt, overdue utility bills, and personal loans. When you file for medical debt relief, your other unsecured debt will be considered as well. The same goes for lost income due to illness, Medical bankruptcy Is not limited to doctor’s bills only.
Related Reading: Is There Medical Debt Forgiveness for the Disabled?
Before pursuing a debt relief option, it may be best to compare pros and cons and costs of all of your different options such as Chapter 7 bankruptcy, Chapter 13 bankruptcy, debt settlement, debt payoff planning and debt management.
Why? Because the goal is to help you be the most informed before choosing an option as each options has costs, including pros and cons and different nuances. To help with this, we build the following debt relief options calculator to help you holistically compare the main options.
Reasons to Consider Medical Bankruptcy:
Unfortunately, having insurance coverage does not guarantee against bankruptcy. Most people facing bankruptcy due to medical reasons find this out too late. Health insurance provides just partial protection despite today’s medical insurance premiums being frighteningly high.
For most medical bankruptcy cases, people are forced to declare medical bankruptcy because insurance deductibles do not cover all medical emergency expenses. This leaves the person with a huge bill that the person’s income cannot cover. Moreover, continued medical expenses do not improve he situation.
1. How do Hospitals Pursue Unpaid Debt Differently than Credit Card Providers?
When you have unpaid medical debts, hospitals will try a variety of ways to make you pay. The first and most likely method is using the hospital’s internal collections department. When this fails, they revert to the methods below.
Although hospitals and medical services providers typically do not sue for unpaid medical debts, this is increasingly happening. More hospitals and doctors are turning to the courts as the patient’s debts soar and deductibles rise. They see this as the only option to collect money and keep the health system afloat, arguing that they take action against patients who have the means to pay.
Another option that hospitals and medical practices increasingly use is selling patient debts to debt buyers. These collection agencies pay hospitals pennies for every dollar of debt, hoping to collect more from patients than they paid. Hospitals off load their rights to patient debt to distance themselves from the infamous and aggressive tactics of debt collectors.
2. Will my Doctor Stop Treating Me if I File a Medical Bankruptcy?
After filing for medical bankruptcy, many debtors wonder if they will still be able to access medical services. The moment the court accepts the ‘discharge order’ for medical bankruptcy, the patient’s liability for the medical debt ceases. This means that the hospital/doctor forever forfeits any right to request payment for the medical debt.
Hospitals can deny patients future services due to the non-payment of medical debt. However, they must correctly terminate the doctor/patient relationship. More specifically, the medical care provider must set in place a strategy for future care. Without this plan, there might be both ethical and legal repercussions, including abandonment charges.
The doctor must provide prior notice to the patient about the termination of the relationship, especially if the patient receives ongoing medical care. However, a doctor cannot refuse to attend to the debtor in a real medical emergency. For instance, if you are in a car accident and rushed to the emergency room, they must attend to you. Note that if a debtor prefers to continue seeing the same doctor, they can set up a plan to pay the debt even after the bankruptcy discharge.
3. Will a Medical Bankruptcy Eliminate all My Medical Debt?
After filing for medical bankruptcy, your debts are separated into various categories, namely non-priority and priority debt. Bankruptcy won’t eliminate debts like a recent overdue tax. Luckily, medical debts fall under the general unsecured category, similar to your credit cards; they don’t get priority treatment, and wiping them off through bankruptcy is easy.
How to Eliminate Medical Bills through Bankruptcy
In both Chapter 7 and Chapter 13 bankruptcy, it is possible to eliminate medical debt. Your choice between the two will depend on your eligibility and what is more sensible in your case.
Chapter 7 Bankruptcy
If you are eligible for Chapter 7, the bankruptcy discharge will do away with your medical bills, plus other unsecured debts. With Chapter 7 bankruptcy, the amount of medical debt you can discharge is limitless. The medical bills you paid using your credit card will also be discharged along with the credit card debt. But to be eligible for a Chapter 7, your disposable earnings should be low enough to pass the Chapter 7 Means test.
Chapter 13 Bankruptcy
In Chapter 13, your medical bills are grouped with all other general unsecured debts that you have. What you will have to pay will be determined by your expenses, income, plus nonexempt assets. Every creditor will receive a portion of the total figure going towards payment of the debts. Remember, if you don’t earn enough to pay the debts in full, you may not be eligible for Chapter 13. Additionally, all your debts and medical bills cannot surpass the allowed Chapter 13 debt limit. We developed a free Chapter 13 calculator to help estimate what your monthly payment would be and the term of a Chapter 13 bankruptcy,
Alternative Options to a Medical Bankruptcy
There are numerous alternatives to bankruptcy. Each has its own set of pros and cons, so we want to provide as much information as possible to help you be informed.
Debt Payoff Planning
The debt payoff planning method is for those who wish to avoid bankruptcy by either increasing income or reducing expenses to manage their debt. There is the snowball and avalanche debt payoff method. Ascend developed a new method which we call the Savvy Method which provides a more customized and data-driven approach to debt payoff.
For debtors who cannot afford to pay off their medical bills, debt settlement is an option. This gives you the option of paying less than you owe. By using a professional debt settling agency, the hospital, doctor, or collection agency will be contacted for negotiations.
In most cases, the creditor will agree to a figure that is less than your debt. According to the experts, it is in your best interest to begin the debt settlement process early before your doctor turns your debt iover to the collection agency. A seasoned debt specialist can negotiate a favorable deal for you.
A debt management alternative is a strategic approach to eliminate unsecured debts such as medical bills. People with medical debts retain debt management agencies to work alongside creditors to reduce interest rates and monthly payments on your debts.
They also advocate for waivers or reduction of penalties. In this scenario, the parties involved can agree on an affordable payment plan that can run for 3 to 5 years. Before embracing a medical debt management plan, you should speak to a credit counselor first. Most of these counselors offer free services, but others might charge some fees.
Medical Bankruptcy Final Thoughts
With this information at your fingertips, you will be better informed at the options facing you should you decide to proceed with medical bankruptcy. You can start the journey to being debt-free today!