Does Bankruptcy Clear Medical Debt?

Edited by Hannah Locklear

Typically when someone declares bankruptcy it is a sign that things are not going well financially. Despite this, if you are suffering from a medical problem or sudden accident, the bills are the last thing on your mind. Instead, you focus on getting healthy again.

Unfortunately, medical bills build-up, and can become extremely overwhelming. If you have considered declaring bankruptcy then you should understand exactly what it means, and if declaring bankruptcy will truly clear your medical debt.

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Does bankruptcy clear medical debt?

When filing for bankruptcy you cannot pick and choose which part of your life you file in. If you file for bankruptcy then you will be given relief from most of your debts including your medical debt. This is because medical debt is considered non-priority unsecured debt, meaning it's dischargeable (forgiven).

The only debts that will not be forgiven are priority debts. These include tax bills, child support, and most student loans. If you default on any secured debt like a mortgage or a car loan, then you will lose the collateral you put up.

For anyone dealing with overwhelming debt, such as medical bills, it is important to understand what bankruptcy will do to your life. It is not necessarily a quick fix and has long-term ramifications.

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Understanding how bankruptcy works

During the bankruptcy process, you will be required to work with a court-approved credit counselor as well as a trustee. All of your debts will be disclosed, as well as your income, and property. Then the court will determine what the next steps will be. It is an extremely complicated process.

There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. These two forms of filing bankruptcy address excessive debt, but they are very different.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is typically filed when you cannot afford to repay your debts. You will speak to the court about what you owe, and they will sell any assets to help you pay off your debt. When filing a Chapter 7 bankruptcy your medical debt will be discharged within a few months. This might sound great, but it is not the best choice for everyone.

To file for Chapter 7 bankruptcy, your income must be below a specified median for the state you reside in, as well as the size of your household. Additionally, if you own property it may be liquidated and the money received will be used to pay off your debts. There are cases of exemptions, but most often you will end up losing your property.

Another thing to take into consideration is that it will take anywhere from three to seven months. After the bankruptcy is declared final, all of your eligible debts will be forgiven. Despite this, it will stay on your credit report for 10 years. This will make it difficult to be approved for loans, or at least obtain one with favorable rates and terms.

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Chapter 13 bankruptcy

Filing a Chapter 13 bankruptcy means that you are working to pay back your debt in a more manageable way. After you decide to file for a Chapter 13 bankruptcy, the court will look at all of your debt, income, and assets. They will then create a court-mandated plan to help you repay it. This might be a plan to repay some of your debt, or all of your debt, in affordable monthly installments. These installments may not exceed 15% of your disposable income.

Typically a Chapter 13 bankruptcy results in a three to five-year repayment program. This is based on the debt you owe and how much income you make. plan. The plan is based on your debt and income levels. At the end of your payment period, you may have some of your debts discharged, where you will not need to pay off the rest of your debts.

There are rules involved in a chapter 13 bankruptcy, as the debt cannot exceed certain levels. You may not have more than $394,725 in unsecured debt and no more than $1,184,200 in secured debt to file. You must also have a regular income to continue to pay on your loans.

In some cases, homeowners are better suited to choose a Chapter 13 filing. This is because it stops the foreclosure process and allows you to include your home loan as one part of your repayment plan. Although a Chapter 13 filing may seem more favorable than a Chapter 7 filing, it also stretches out over years, elongating the entire process.

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