Chapter 7 Personal Bankruptcy Due to Medical Bills

Health care billing statement with stethoscope, bottle of medicine for doctor's work in medical center stone background.

Navigating the complexities of Chapter 7 bankruptcy due to overwhelming medical bills can be a challenging journey. It’s not uncommon to find oneself burdened by healthcare expenses that spiral out of control, leading to financial distress. Chapter 7 bankruptcy can provide relief from medical debts, offering a helpful option to many people facing these issues. Toronjo & Prosser can guide you through understanding this option and its implications for your financial future.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, often referred to as liquidation or straight bankruptcy, is a legal process designed to help individuals overwhelmed by debt to get a fresh start. It primarily deals with unsecured debts, such as medical bills and credit card balances, offering a way to discharge them, meaning the debtor is no longer legally required to pay these debts. Unlike Chapter 13 bankruptcy, which involves a repayment plan, Chapter 7 typically involves a trustee selling non-exempt assets to pay off creditors. In many cases, debtors are able to protect their assets under the available exemptions and they are not sold. This process provides a pathway for those facing significant financial hardship to eliminate debts and regain financial stability.

Chapter 7 is a powerful tool for debt relief, but it’s only suitable for some. Eligibility hinges on various factors, including income level and previous bankruptcy filings. The process involves a “means test” to assess whether your income is low enough to qualify. Not all debts can be discharged in Chapter 7; for instance, student loans, child support and most tax obligations do not get discharged in a chapter 7 bankruptcy. Therefore, it’s important to assess your individual situation to determine if Chapter 7 is the right choice for resolving your financial challenges, particularly those arising from overwhelming medical expenses.

Medical Bills and Bankruptcy

Medical bills are a leading cause of financial strain, often pushing individuals towards bankruptcy. An unexpected illness or injury can lead to mounting medical expenses, quickly overwhelming one’s financial stability. For many, insurance coverage is insufficient, resulting in significant out-of-pocket costs. This financial burden is a harsh reality for numerous Americans, with medical debts contributing substantially to the high rate of bankruptcies in the U.S. Filing for Chapter 7 bankruptcy becomes a viable option for those grappling with unmanageable medical debts, offering a way to discharge these obligations and start anew. It’s a critical lifeline for those caught in the crossfire of health crises and financial distress.

Qualifying for Chapter 7 Bankruptcy

Qualifying for Chapter 7 bankruptcy involves meeting specific criteria, central to which is the means test. This test is designed to determine if your income is low enough to file for Chapter 7. It compares your average income over the past six months to the median income for a household of your size in your state. If your income falls below this median, you qualify. However, even if it’s higher, you may still be eligible after subtracting allowed monthly expenses and payments on secured debts. This process ensures that Chapter 7 is accessible to those genuinely in need of its debt relief provisions.

For individuals burdened by high medical debts, the means test can be a pivotal factor. Since medical bills are considered unsecured debt, they significantly impact your financial situation, potentially making you a suitable candidate for Chapter 7. Moreover, other eligibility criteria include not having filed for Chapter 7 bankruptcy in the last eight years and attending a mandatory credit counseling session before filing. Understanding these requirements is essential in determining your path towards financial recovery.

The Process of Filing for Chapter 7 Due to Medical Bills

  • Consulting a Bankruptcy Attorney: Begin by consulting a bankruptcy attorney to evaluate your situation. They can help determine if Chapter 7 is the best option for your medical debts and guide you through the process.
  • Completing the Means Test: Complete the means test to establish your eligibility. This test assesses your income and expenses to determine if you qualify for Chapter 7 bankruptcy based on your financial capacity.
  • Gathering Financial Documents: Collect necessary financial documents, including medical bills, income statements, tax returns, and a list of assets and liabilities. 
  • Credit Counseling Requirement: Prior to filing, you must complete a credit counseling course from an approved agency. This course is designed to ensure you understand all your options and the implications of bankruptcy.
  • Filing the Petition: Your attorney will prepare and file a bankruptcy petition with the court. This legal document includes detailed information about your debts, assets, income, and expenses.
  • Dealing with Creditors: After filing, an automatic stay goes into effect, stopping most collection actions against you. Creditors will receive notice of your bankruptcy filing and will be directed to halt their collection efforts.
  • Attending the 341 Meeting: Attend the 341 meeting, or creditors’ meeting, where trustees and creditors can ask questions about your bankruptcy filing and financial situation. 
  • Discharging Medical Debts: Upon completion of the bankruptcy process, most of your unsecured debts, including medical bills, will be discharged, releasing you from the obligation to pay them.
  • Final Steps and Financial Education: After the discharge, complete a debtor education course to learn financial management skills. This step is mandatory for the finalization of your bankruptcy process.

Life After Chapter 7 Bankruptcy

Life after Chapter 7 bankruptcy marks a new beginning, offering relief from the burden of unmanageable debts, including medical bills. While it does impact your credit score, typically lowering it in the short term, the discharge of debts provides a clean slate for financial rebuilding. Post-bankruptcy, it’s important to adopt sound financial habits, like budgeting and timely bill payments, to gradually improve your credit score. Many find they can start rebuilding credit within a few years, with access to credit lines and loans improving over time. The key is to embrace this fresh start as an opportunity for responsible financial management and long-term stability.

How Toronjo & Prosser Can Help with Medical Debt

At Toronjo & Prosser, we understand the complexities of Chapter 7 bankruptcy and are dedicated to guiding you through every step. Our experienced team provides personalized support, ensuring you’re informed and comfortable throughout the process. We can help you navigate the challenges of medical debt and find a path to financial freedom. Don’t let the weight of financial burdens hold you back any longer. Contact us today for a consultation and take the first step towards reclaiming your financial future.