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The link between bankruptcy and medical debt

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Many people equate financial trouble with a dire monetary collapse. In truth, a significant number of Americans are one or two unexpected expenditures away from debt challenges. These unexpected expenses could be related to home repair or medical bills. Additionally, life events such as job loss or divorce can send finances spiraling out of control. Fortunately, bankruptcy exists as a way for individuals to eliminate debt and work toward a fresh financial future.

One of the common reasons for bankruptcy is medical-related debt. This could refer to surgical procedures, extended hospital stays, lengthy physical therapy or exorbitant prescription medication costs. Unfortunately, these debts can quickly mount leaving an entire family struggling to make ends meet.

  • Medical debt and Chapter 7: In Chapter 7, also referred to as debt discharge, unsecured debt is ultimately eliminated. There are eligibility requirements, though, as Chapter 7 is means-based – income must fall below the state’s median for the equivalent household size. The bankruptcy process can take several months, the end of which sees all eligible debts forgiven. Medical debt is generally considered an unsecured debt and is eliminated at the end of the process.
  • Medical debt and Chapter 13: In Chapter 13, also referred to as debt reorganization and repayment, a court-mandated repayment plan is created. This plan, designed to last three or five years, allows individuals to make single monthly payments to a trustee who will then determine which creditors are paid. The monthly payment will generally not exceed 15% of your disposable income. When the repayment period ends – designed to pay a portion of the total debt, not all of it – the remaining eligible debt is discharged, including debt associated with your various medical bills.

Individual circumstances can lead individuals to choose which process they’d rather pursue. Chapter 7 is a shorter process but might require the liquidation of certain assets. Chapter 13 takes longer, but can protect your house, car or other large assets. It is wise to discuss your situation with a skilled legal professional to decide which method is best for you.