Medical Bills and Bankruptcy: Can filing a bankruptcy affect my medical bills?

The following post is part of our Law Student Blog Writing Project, and is authored by Jennifer Tressler, who is pursuing her Juris Doctorate at The Ohio State University Moritz College of Law.

Seeing medical bills pile up is one of the most stressful and overwhelming experiences a family can go through, particularly when being able to pay for them seems to be a far-off dream unable to be reached in this lifetime. Sometimes, the only thing that seems feasible is declaring bankruptcy. If this sounds like you, do not worry! You are not alone.

Although courts do not require individuals declaring bankruptcy to disclose their reasons for doing so, research shows us that medical bills are the single largest cause of personal bankruptcy, accounting for between fifty and sixty-two percent of all personal bankruptcy filings. This is unsurprising when considering that medical bills often come on suddenly, can be unexpected, and are often very large amounts of money that insurance does not always cover. [Ed. Note: In Northern Kentucky, most medical treatment is provided by St. Elizabeth hospital or one of its subsidiaries. The article below applies to St. Elizabeth and all its subsidiaries, regardless of whether St. Elizabeth has filed a lawsuit against you!]

When filing for bankruptcy, a consumer’s debt is separated into multiple categories. This is because only certain debts can be eliminated through bankruptcy. Fortunately, medical debt is one of them! During bankruptcy, medical debt is considered general, unsecured debt, just like credit cards. This means that medical bills receive no priority treatment during bankruptcy and are able to be wiped out during bankruptcy filing. Depending on what type of bankruptcy a consumer qualifies for and which type of bankruptcy is in his or her best interests, he or she may be able to eliminate financial obligations for medical bills through filing for either Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 bankruptcy is more common than Chapter 13. If a consumer qualifies for Chapter 7 bankruptcy, medical bills, along with all other general, unsecured debt, will be eliminated. There is no limit to the amount of medical debt that can be discharged in Chapter 7 bankruptcy. Any medical bills paid for by credit card will also be discharged. However, in order to qualify for a Chapter 7 bankruptcy, a consumer’s disposable income must be low enough to pass a means test.

The means test is intended to disqualify people with too high of income levels from filing for Chapter 7 bankruptcy. The test calculates whether or not a consumer has the means to pay back a portion of what is owed to creditors. It compares a consumer’s average monthly income for the six months prior to filing for bankruptcy against the median income of the state the consume is domiciled in while factoring in the consumer’s expenses as well as the national and local standards for living expenses. The test takes this information and determines whether a consumer has any disposable income left over with which to pay creditors.

A simple way to determine if you pass the means test is to figure out if your income is above or below your state’s median income for households which are the same size as your own. If your average income for the six months prior to filing for bankruptcy was below the median, you automatically pass the means test and qualify for Chapter 7 bankruptcy and do not need to fill out the rest of the means test. If your average income for the six months prior to filing for bankruptcy was above the median, you do not automatically pass the means test. However, this does not mean you have failed; it simply means you must complete the rest of the test, which requires more information about your expenses.

When filling out the means test, you are required to use IRS standard expense figures (which can be found here) for Northern Kentucky for certain living expenses, even if your actual expenses are higher than the allowed standards. However, actual expense figures are allowed for other expenses such as mortgage, car payments, taxes, health insurance, and child care. Speaking to an attorney can help you figure out the best way to determine if you can pass the means test.

If you do not pass the means test, you cannot file for Chapter 7 bankruptcy. You still may be able to file for a Chapter 13 bankruptcy, which is more complicated than a Chapter 7, but this means that you will likely have to pay back a portion of your debts.

In Chapter 13 bankruptcy, medical bills are categorized with other general, unsecured debts in a consumer’s repayment plan. The amount a consumer must pay general, unsecured creditors depends on income, expenses, and nonexempt assets. Each creditor receives a proportional (“pro rata”) portion of the total amount going towards the debts in the repayment plan. However, consumers can possibly have debt that is too high for a Chapter 13 bankruptcy.

Unsecured debt does not have property or other assets serving as collateral for its payment. Most consumer debt is unsecured. Chapter 13 bankruptcy is only available for consumers who have less than $394,725 total in unsecured debts, though this number changes periodically. Unfortunately, many of the people with debt higher than this cap are people with substantial medical bills. In addition to the unsecured debt limit, consumers must also not have secured debt (debt which has property attached to it as collateral) above $1,184,200 as of April 2016. This most commonly includes mortgages. More often, consumers do not meet the secured debt limit rather than the unsecured debt limit.

Chapter 13 bankruptcy is an option that allows consumers to retain property that they would otherwise lose in a Chapter 7 bankruptcy. What debts are repaid, how much is paid each month, and what happens to debts at the end of a three to five year period is all laid out in a Chapter 13 repayment plan. Though the process of filing for bankruptcy may seem overwhelming, it can help to relieve some of the debt that individuals are struggling to keep up with from harsh medical bills and lack of insurance.

If you are overwhelmed by mounting debt and tired of receiving harassing phone calls from creditors, contact Lawrence & Associates today. We’ve helped hundreds of people overwhelmed with mountains of medical bills, and we can help you obtain that fresh start that you deserve! Call today for a free consultation at (859)371.5997. We’re Working Hard for the Working Class, and we want to help you!