Medical debt can be a tough pill to swallow.
According to CNN.com, over 62 percent of bankruptcies filed in the year 2007 were medically related, because the individual debtors had more than $5,000 in medical bills, mortgaged their home to pay for medical bills or lost significant income due to illness. Bankruptcy is an attractive option for individuals suffering from medical debt, because medical debt can be forgiven at the end of the bankruptcy process.
Types of Debt
Secured debts are backed by collateral. If a debtor defaults on a secured loan or debt, the creditor can take the property as a form of payment. The creditor may keep that property or sell it to recoup its loss. Examples of secured debts are mortgages, auto loans, furniture loans and appliance loans.
Unsecured debts do not have any collateral attached to them. If a debtor defaults on an unsecured loan or debt, the creditor cannot take any of the debtor’s property to satisfy the debt. Instead the creditor may attempt to coerce the debtor to pay by commencing collection actions. Examples of unsecured debts are credit card debts and cash advances, student loans, medical bills, rent and health club memberships.
Chapter 7
In a Chapter 7 bankruptcy case, a debtor will file his bankruptcy petition, and a trustee will be appointed to the debtor’s case. The trustee will gather the debtor’s property, separate the exempt property from the non-exempt property and sell the exempt property to pay a portion of the debtor’s creditors. The debtor’s state of residence has a list of property that cannot be sold to pay creditors. After the debtor’s non-exempt property has been sold, the bankruptcy court will grant the debtor a discharge of his unsecured debts. Medical debt would be included in the unsecured debts that will be discharged.
Chapter 13
A Chapter 13 bankruptcy case works differently. When the debtor files her bankruptcy petition, she must present a proposed debt repayment plan to the bankruptcy court shortly thereafter. Her creditors can object to the plan, but ultimately the bankruptcy judge decides whether or not to accept the plan. A trustee serves in a Chapter 13 case, but in this case, the trustee accepts monetary payments from the debtor. The debtor makes repayment plan payments to the trustee, and the trustee pays each of the debtor’s creditors for the length of the plan, which would be three to five years.
Debts paid under the repayment plan include: 100 percent of the fees involved with filing the bankruptcy; 100 percent of priority claims such as student loan and child support debt; 100 percent of mortgage defaults and other secured debts; and anywhere from zero percent to 100 percent of unsecured debts such as medical debt. Once each plan payment has been made on time, the remainder of the debtor’s unsecured debts, including medical debt will be discharged.
Tags: medical debt, medical bills, repayment plan, unsecured debts, bankruptcy case, bankruptcy court, bankruptcy petition
