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What is Medical Bankruptcy?

The incidence of medical bankruptcy has increased over the last couple of years and in some places, it is up by 300%. You are referred to as a “medically distressed” debtor in bankruptcy if you have spent 25% or more of your annual income on medical expenses that are not reimbursed. You are also said to be medically bankrupt if you are not able to attend your work for 4 weeks at a stretch due to your own illness or illness of your relative.

Medical Bankruptcy Fairness Act (2008)

The Medical Bankruptcy Fairness Act of 2008 was introduced to extend relief to the debtors who are in medical distress. The Act increases Federal Homestead Exemption in Bankruptcy to USD$250,000 for medically distressed debtors. However, increase in homestead exemption will benefit who have enough equity in their home. It won’t be of much help for people who have taken out home equity line of credit or second mortgages.

Bankruptcy Code treats all debts alike

The Bankruptcy Code treats all debts in a similar manner and doesn’t differentiate medical debts from credit card debts, car loans or mortgage debt. Medical bankruptcy is not formal in United States. Nevertheless, medical bills can be either discharged in case of Chapter 7 bankruptcy or the medical debts can also be restructured in Chapter 13 bankruptcy.

As per reports furnished by “Health Affairs Medical Journal”, majority of bankruptcy filings are due to
medical bills. The higher incidence of medical bankruptcy can be attributed to the fact that medical field believes in aggressive debt collection. This drives debtors to file bankruptcy with the hope of getting some financial relief.

How your medical bills are treated in Chapter 7 bankruptcy?

When you file Chapter 7 bankruptcy, your medical bills are forgiven most of the time. However, it gets recorded in your credit report for a period of 10 years. It reduces your chances of getting fresh credit even if you file bankruptcy for doing away with your medical bills.

How your medical bills are treated in Chapter 13 bankruptcy?

When you file Chapter 13 bankruptcy, you are allowed to pay off your medical bills through a new repayment plan. Chapter 13 safeguards you from lawsuits and helps you to retain your assets. You may be allowed to pay off your medical bills for less than what you owe. The same gets recorded for a period of 7 years in your credit report.

Reasons for upsurge in medical bankruptcy

There are 2 main reasons why medical bankruptcy is on the rise. The main reason is that cost of health care is escalating with every passing day. Cost of prescription drugs is increasing. The second reason is due to the employers passing a major portion of the health insurance cost to the employees.

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