MEDICAL BANKRUPTCY: FACT OR FICTION?

You have probably heard someone use the term “medical bankruptcy.” This is a word commonly used by individuals who either are going through a medically related financial crisis, or are acquainted with someone who is facing severe medical debt. Although medical bankruptcy is not a legal term, it is a useful term to describe a financial remedy for an individual who may have reached the end of their rope because of medical debt.
Medical bankruptcy can be a misleading term because there is no legal remedy available exclusively for medical debt. In general, bankruptcy is the dissolution or reorganization of some or all of an individual’s debt. When you file for any type of bankruptcy you must include all your debt. This would apply to home mortgage loans, car loans, credit cards, and medical debt. There are several types of bankruptcies, but most individuals filing a bankruptcy for medical debt will typically file for a Chapter 7 or Chapter 13 bankruptcy. A Chapter 7 bankruptcy may allow an individual to eliminate their debt, while a Chapter 13 bankruptcy can allow an individual to reorganize their debt into a 3-5 year plan, while at the same time reducing the principle on their debt.
The idea that a medical bankruptcy exist as a legal remedy may have developed because the court handles medical debt in a different way than they might other types of debt. Not all debt will receive the same treatment in court. A bankruptcy court will generally divide an individual’s debt into two classes: Secured Debt or Unsecured Debt. Secured debt is the type of debt that is usually tied to assets like an auto loan or home mortgage. Unsecured Debt is usually not tied to assets, yet can often be eliminated or greatly reduced through a bankruptcy. It’s important to realize that medical debt is usually classified as an unsecured debt.
While the term “medical bankruptcy” is not a legal term, it is a useful way for an individual to describe how their finances fell into chaos. An experienced bankruptcy attorney will immediately understand what a client needs when they inquire about a medical bankruptcy. A bankruptcy attorney can then inform them how a bankruptcy could be a solution to their financial hardship caused by medical debt, and even help the individual decide whether a Chapter 7 or Chapter 13 is most appropriate for their situation. Once an individual has decided the best course of action, the attorney will then lead them smoothly through the legal process of filing, and obtaining a bankruptcy.