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Bankruptcy and Medical Debt

Most people think that most of those who file bankruptcy did so because they got way over their heads in credit card debt; however, research shows the truth is much more surprising.  Research indicates that over  50 percent of all personal bankruptcies are the result of medical debt by those with health insurance.  A significant percentage of those listing medical debt as the reason for their bankruptcy are 65 and older.  Other groups disproportionately bankrupted by medical debt include single women raising children on low wages or who have been abandoned by their husbands who refuse to pay child support.

The medical debt causing these bankruptcies isn't overwhelming in many circumstances.  Statistics available are as follows:  about 20% of bankruptcy filings involve a medical debt of less than $1,000; about 40% involve a medical debt of less than $5,000; and 13% of bankruptcy filings involve a medical debt of over $10,000.  One would think these people could make some sort of payment arrangements to pay off the debt rather than file bankruptcy.

Perhaps many file bankruptcy for the simple reason that the medical collection industry is so inflexible and will not work out reasonable payment plans for those who can not pay the debt off quickly.  Instead, hospitals, doctors, and medical collection agencies rush to the courthouse to file small claim lawsuits (those less than $5,000).  In fact, many small claims courts are clogged with such suits, with medical debt lawsuits making up a large portion of a court's docket.  And this trend is only going to increase as many hospitals, doctors and other medical-related businesses turn their delinquent accounts over to collection agencies in 30 or 60 days rather than waiting the traditional 150 days before doing so.  Another trend is for medical-related businesses to sue in small claims court for very trivial amounts, say $100, rather than just write the debt off as a bad debt.

So what is a person owing medical debt that they cannot pay to do?  Other than getting the creditor to agree to an affordable repayment plan, one can:

Option 1:  File Chapter 7 bankruptcy.  The first option is to file a Chapter 7 bankruptcy, which would wipe out all unsecured debt, including medical debt.  The biggest problem with doing this is that, once a person files bankruptcy, he or she cannot do so again for six years.  If this person should get sick during that six year period, there might be nothing to save them from wage garnishments, judgments or liens to recover future unpaid medical debt.

Option 2:  If you have a limited income, when the creditor sues you, go to court and have your income and other property declared exempt from the creditor and avoid filing bankruptcy.  For example, those who live solely on social security (or have a very limited income) can defend such a suit by proving to the judge that their social security check is their only source of income and cannot be taken by creditors. 

How do you keep a creditor from taking what little you have?  When you are sued and you go to court, tell the judge that you want your income and property declared legally exempt.  Make sure that you do not say or sign anything that waives your property exemption rights.   IT IS YOUR RESPONSIBILITY TO TELL THE JUDGE THAT YOU WANT CERTAIN PROPERTY DECLARED EXEMPT.  DO NOT WAIT FOR THE JUDGE TO ASK YOU, AS SHE / HE MIGHT NOT DO SO.

The creditor or collection agency who is suing you will likely get you to sign a repayment plan.  Do not agree to a repayment agreement that you cannot afford, and again, make very sure that the agreement you sign does not include a clause where you waive your right to have your income and property state law allows you to declare as exempt from creditors.  If you can only afford $15 a month, then tell the judge this -- in fact, prove it to him by bringing as many records of your living expenses to court with you, including utility bills and grocery receipts.  DO NOT SIGN A REPAYMENT PLAN YOU CAN'T AFFORD TO PAY AND THEN DEFAULT ON IT!

What property is exempt from creditors and debt collectors in your state?  Almost all states exempt income under a certain amount to protect those with low incomes from creditors.  For example, your state might have legislation on the books that says a creditor can only seize any net income over $250.00 per week.  If you make $250 or less per week, your income is exempt. Your state might put a cap on how much of your wages can be garnished, perhaps no more than 15 percent.  Click here to find out what the wage garnishment law is in your state.

In addition, your state might have declared that government benefits, such as social security, welfare, unemployment compensation and veteran's benefits might also be completely or partially exempt.  Your state might also have exempted retirement benefits (pensions), child support, worker's compensation, life insurance policies, and personal injury awards.  Your state might offer you a homestead exemption that protects a certain amount of the equity in your home from creditors.  The cash you have in the bank might be protected, as is your car and other assets, such as your clothing, furniture, work tools and a vehicle.

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