Bankruptcy is a legal mechanism whereby people struggling with debt are given a fresh start. There are many myths surrounding bankruptcy, most of them fed by bill collectors, banks, lending institutions, and other creditors. One of the biggest myths about bankruptcy is that medical bills cannot be discharged. (See also Alternatives to Medical Bankruptcy).
Are Medical Bills Dischargeable In Bankruptcy?
Each year millions of Americans are forced to file bankruptcy as a result of overwhelming medical bills. When a consumer files bankruptcy, he must list all of his debts, including medical bills, credit card debts, mortgages, auto loans, tax debts, student loans, and domestic support obligations in the bankruptcy petition. (See also Filing for Medical Bankruptcy). The debts are divided into three categories:
- Secured;
- Priority Unsecured Debts; and
- Unsecured Debts.
Generally, medical bills are unsecured debts. Like most unsecured debts, medical bills are dischargeable. In a Chapter 7 bankruptcy case, a debtor's unsecured medical bills would be wiped out. In a Chapter 13 case, depending on his net monthly income and the amount of secured vs. unsecured debts, a debtor may be required to pay a portion of his medical bills and other unsecured debt. However, there is the possibility that a Chapter 13 debtor would not have to pay any of his medical bills or other unsecured debt.
In the rare instances where the provider of medical services has obtained a judgment against a debtor, the debt would be considered a secured debt. This means that the medical services provider (the creditor) has a judicial lien against all of the debtor's property. Under the bankruptcy code, judicial liens securing dischargeable debts may be avoided.
What Is Lien Avoidance?
The general rule is that liens pass through a bankruptcy and are unaffected by a discharge. In other words, once a debtor has received a discharge, a lien creditor (also known as a judgment creditor) is free to pursue collection efforts against the debtor. Lien avoidance modifies this rule by affording the debtor a means of wiping out certain liens, including judgment liens. So, as previously stated, if a provider of medical services has obtained a judgment against a debtor, the debtor may be able to avoid the lien by virtue of the lien Avoidance Powers authorized under the Bankruptcy Code.
Talk to a Bankruptcy Attorney
Although there is a lot of information about bankruptcy available on the Internet, anyone contemplating bankruptcy should consult with an experienced bankruptcy attorney. A qualified bankruptcy attorney will review your financial situation, explain the difference between Chapter 7 and Chapter 13 bankruptcy, and recommend the best course of action to achieve your goals while at the same time protecting your assets.
