Medical Bills

Medical debt is one of the main factors leading to bankruptcy. In fact, it’s a contributing cause in 62 percent of personal bankruptcy filings, according to a 2009 study that appeared in the American Journal of Medicine.

Medical debt differs from other forms of consumer debt, since it usually results from something completely unpredictable – an illness or injury. In addition, illness or injury often prevents a person from working and earning income to pay off the bills. Many American families are just one serious illness or injury away from bankruptcy.

Surprisingly, nearly three-quarters of those filing for bankruptcy because of medical debt have health insurance. Most of them are middle-class, well-educated homeowners. Modern insurance policies have so many loopholes, co-payments and deductibles that a serious illness or injury can bankrupt even the insured.

Plus, many people who lost their jobs in the recent economic recession lost their health insurance as well.

Chapter 7 personal bankruptcy liquidates all of your assets to pay your debts. In this case, medical bills are treated the same as credit cards and other forms of unsecured debt. They are completely discharged, or wiped out.

However, if you discharge your debts in Chapter 7 bankruptcy, you must wait eight years to file again. If your medical treatment is ongoing, you should wait until it is complete before filing for bankruptcy. You want to avoid new debt after bankruptcy.

A Chapter 13 or “reorganization” bankruptcy does not erase your debts like Chapter 7, but instead creates a plan for repaying specific debts, sometimes at reduced rates, over a period of three to five years.

Secured debts like home mortgages and car loans are paid off first, followed by “priority” debt like federal and state taxes and child support. Unsecured debt (like medical bills) comes last. Any debt remaining after completion of the plan is usually discharged.