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Medical Debt and Bankruptcy

Having an accident or a sudden major medical event can be devastating to a person’s financial health. Medical bills and time away from work can quickly wipe out any savings a person may have and create a lot of overwhelming debt. One’s health must take priority over other financial obligations, but recovering from the financial fallout may not be feasible. In this situation, bankruptcy could be the option to relieve this burden and allow for a full physical and financial recovery. Some lawmakers and policy advocates have looked at the incidence of medical debt and bankruptcy in recent years to determine if this issue was a driving force behind the increasing number of bankruptcy filings among Americans. While there is some disagreement about the interpretation of the results of the study, it does appear that medical debt is a contributing factor to the bankruptcy rate in this country.

Two types of bankruptcy are primarily used by individuals to get rid of insurmountable debt: Chapter 7 and Chapter 13. Chapter 7 bankruptcy will be addressed here. Chapter 7 bankruptcy is a liquidation process that allows debtors to wipe out, or discharge, debts owed to creditors. Most of the debt must be consumer-based, which includes unpaid medical bills. The bankruptcy trustee, appointed by the bankruptcy court, determines which property is not exempt from bankruptcy. The non-exempt property is then seized, sold, and the proceeds divided among the creditors. However, the bankruptcy rules do not treat all debts equally. Some are given more importance, and thus are paid before others. A look at how medical debt specifically fits within the various categories of debt in bankruptcy will follow below.

Secured Debt

This type of debt involves property with liens attached and allows a creditor to repossess or foreclose on the property if the owner stops paying off the debt. The property acts as collateral, which gives the creditor a continuing interest in it until the debt is paid off. Examples include mortgages and car loans. These debts are typically paid first, depending on the other types of outstanding debt, if the debtor has any property to liquidate, but medical debt is not included in this category.

Unsecured Debt

All debt that is not secured is considered unsecured, and is sub-divided into priority and non-priority debts.

Priority Debts

Bankruptcy does not wipe out these types of debt, and the debtor remains liable for paying them once the bankruptcy concludes, if these obligations remain unpaid. These debts are generally paid before others, and include child support, alimony, certain income taxes and criminal fines. Medical debts are not included in this category.

Non-Priority General Unsecured Debts

Most debt in Chapter 7 bankruptcies fall into this category, which represents any debt not previously described. These debts do not survive bankruptcy, with a few exceptions including student loans, and are generally not repaid in Chapter 7 cases. Some examples are credit card debt, personal loans, and medical bills. Since they are part of the non-priority unsecured debt, medical bills will be among the last debts to be paid if any money is available, and any outstanding balances will be wiped out by the bankruptcy court. There is no cap on the amount of medical debt that may be discharged, so bankruptcy could be a good option if unpaid medical bills are beyond a person’s ability to pay.

Contact a Bankruptcy Attorney

If you are overwhelmed by debt and want to stop the incessant calls from unpaid creditors, talk to a bankruptcy attorney about possibility of getting relief. Attorney Christopher L. Arrington handles Chapter 7 bankruptcy cases for clients in the Indianapolis area, and understands how difficult these situations can be. Contact him today to schedule an appointment and get further information.

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