Use Bankruptcy to Eliminate Your Medical Debt
Millions of Americans face unexpected medical costs. Even with insurance, such costs can leave people with substantial debt. According to the Sycamore Institute, a public policy research institute in Tennessee, over one in five Tennesseans had medical debt on their credit report in 2018, before COVID.
Many people delay lifesaving medical treatment or face stark choices between paying for medical care or putting that money toward food or rent. Others endure wage garnishment or harassment from debt collectors. No one should have to risk their health or lose everything over medical costs.
Bankruptcy courts offer protection to people who cannot pay their debts. It can allow debtors some relief from debt and a chance to get their finances under control.
Bankruptcy has long-term consequences for your credit score. If you are considering bankruptcy, understand the benefits and costs before starting the process.
The Basics of Bankruptcy
Bankruptcy discharges, or forgives, some debts. Certain types of debts, such as student loan debt, cannot typically be discharged. Medical debt and credit card debt from medical bills can typically be discharged. As a result, bankruptcy can be a powerful tool in recovering from medical debt.
Filing for bankruptcy involves submitting a petition for bankruptcy to the clerk of the bankruptcy court. The court will then appoint a trustee to oversee your assets. You, the trustee, and your creditors will meet in a 341 hearing to discuss your finances and develop a repayment plan.
In accordance with the bankruptcy code, the trustee will determine which debts will be discharged and which will be repaid. The bankruptcy procedure depends on the type of bankruptcy for which you have filed. There are two main options for individuals filing for bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is for people who cannot pay their debts even if given time. It involves liquidation (selling off) of assets to pay a portion of the debt in question. In Chapter 7 bankruptcy, the trustee will sell off your assets. The trustee will use the money from the sale to pay your creditors.
You will get to keep some assets, which are called exemptions. These can include:
- a primary residence
- a car
- retirement accounts
- some benefits
- a portion of wages
- tools required for work
There are limits to these exemptions under Tennessee law, including caps on the dollar amount. An experienced bankruptcy attorney can explain the options.
A process called reaffirmation allows you to keep some of your assets.
Reaffirming a debt means agreeing to pay creditors more in exchange for getting to keep a non-exempt asset.
Filing for Chapter 13 bankruptcy gives people time to reorganize their assets and repay bills. In Chapter 13 bankruptcy, you will have three to five years to repay debts. One advantage of Chapter 13 bankruptcy over Chapter 7 is that it generally allows you to keep more of your assets.
Before Declaring Bankruptcy
Before declaring bankruptcy, debtors should keep the following points in mind.
- There may be alternatives to bankruptcy. Negotiating a payment plan with creditors could allow you to retain your credit rating. Personal loans, government programs, charities, or crowdfunding could cover some costs.
- The U.S. Bankruptcy Code sets the conditions in which you can declare bankruptcy. This involves a “means test” based on your income and expenses.
- You will also be required to attend credit counseling before you can file.
There is a $335 filing fee, but the court can waive the fee under some conditions.
If you are planning to declare bankruptcy, be careful about which debts you pay. This is both to comply with bankruptcy law and avoid costly mistakes.
- Giving away assets before declaring bankruptcy could cause problems. This is known as a fraudulent conveyance. If the intent was to hide assets from creditors, it could result in fines or imprisonment.
- Retain assets that could be protected under bankruptcy, if possible. Selling your car before bankruptcy, for example, could allow creditors to claim the proceeds even if they would not have been able to force you to give up the car during bankruptcy.
Consulting with a bankruptcy attorney before filing for bankruptcy can help avoid these and other pitfalls.
The Pope Firm has experience in many types of bankruptcy proceedings, including bankruptcies due to medical debt. We provide a range of services relating to Tennessee bankruptcy law and have offices in Johnson City, Kingsport, and Knoxville. If you believe bankruptcy might be the right choice for you, call today to schedule an appointment.
The Different Types Of Bankruptcy
Depending on your situation, there are different types, officially known as “chapters” of bankruptcy, that you can file for. These different chapters of bankruptcy provide different results for different cases, and it’s important to have some knowledge on these chapters before filing for bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a commonly filed for chapter of bankruptcy and is intended for use by low to moderate income individuals with more debt than they’ll ever be able to repay. If properly executed, this chapter of bankruptcy can eliminate most or all of a person’s unsecured debt. If you’re eligible, Chapter 7 could be a great debt relief solution for you.
Chapter 13 Bankruptcy
Another great debt relief solution is Chapter 13 bankruptcy, that works great for people that aren’t eligible for chapter 7 bankruptcy. This chapter allows the debtor, or person that has borrowed money, to restructure their payment plans to be more manageable. At the end of this payment plan, most unsecured debts are discharged, or eliminated. This is sure to provide some much-needed breathing room for those people that feel in over their head, and are in need of some debt relief.
If you need assistance with personal or business bankruptcy and filing in Tennessee, reach out to The Pope Firm and Charles Pope, Attorney At Law.
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Frequently Asked Questions
Bankruptcy occurs when an individual, business, or other entity declares the inability to repay its debts. If you file for bankruptcy, that means that debt collectors must pause attempting to collect debts from you. Bankruptcy often allows you to erase most, if not all, of your debts.
There are two types of debts, unsecured and secured. Some examples of unsecured debts are credit card bills, medical bills, or taxes. Secured debts can include car loans or mortgages, which use the purchased item as collateral. In many cases, filing for bankruptcy can keep this collateral protected and prevent foreclosure of your home or repossession of other assets.
Bankruptcy is governed by federal legislation under the Bankruptcy Code, which falls under the greater United States Code. Both federal law and local law inform the bankruptcy procedure. Federal bankruptcy judges, appointed by the United States court of appeals, preside over court proceedings in these cases. In court, the judge and a court trustee, review your finances to determine whether or not to discharge the debts at hand.
Each state has one or more bankruptcy courts. Tennessee has six bankruptcy courts throughout the state.
Filing for bankruptcy can be a daunting process, and working with a firm with expertise in the field can provide you with necessary guidance.
There are several types of bankruptcy. Most individuals, married couples, and small businesses choose to file under Chapter 7 or Chapter 13.
What are the Differences Between Chapter 7 and Chapter 13?
The primary difference between these two types is that Chapter 7 bankruptcy allows an entity to fully discharge its debts in a short period. A Chapter 13 bankruptcy involves reorganizing debts and creating a plan to repay those debts over an allotted time. After that time, Chapter 13 eliminates most of the remaining debts.
Chapter 7 bankruptcy is typically filed by those with very limited income and unsecured debts, the most common of which is medical bills. Chapter 13 bankruptcy is most often filed by higher income bracket individuals and those with more assets, such as a car or a home. The motivation for filing Chapter 13 bankruptcy is often preventing assets from being repossessed or home foreclosure due to outstanding debts.
What Other Types of Bankruptcy Are There?
Two other types of bankruptcy are Chapter 11 and Chapter 12.
Chapter 11 primarily applies to larger companies and corporations, but sometimes it is the right choice for small businesses as well. Chapter 12 applies to those who are considered family farmers.
Various considerations get factored into who should file bankruptcy. Filing bankruptcy may be the right choice for you if you are overwhelmed by debt. Regardless of what type of bankruptcy you file, as soon as the process begins, you are granted an automatic stay. A stay is an injunction that prevents creditors from collecting any debts for an allotted time. An automatic stay halts the process of, for example, foreclosing on a home or repossessing a vehicle.
A Chapter 7 bankruptcy will discharge most of your debts. Filing Chapter 7 is appropriate for those who make less than the median household income in Tennessee and whose assets would not be at risk. In this situation, your non-exempt property is sold to pay off creditors.
Chapter 13 bankruptcy allows you to create a plan to repay your debts. If you have non-exempt property used as collateral in secured loans, you can restructure your finances to pay off any relevant debts over the next three to five years. Chapter 11 functions in a similar way, but is exclusively for businesses.
Filing for bankruptcy can provide a fresh start for those bogged down with debt, either by restructuring finances or discharging debts entirely.
How bankruptcy affects business depends upon the type of bankruptcy filed.
Businesses classified as corporations, partnerships, or LLCs can file Chapter 11 bankruptcy. Chapter 11 allows for debt restructuring, while the business stays open. As in Chapter 7 and Chapter 13, an automatic stay activates as soon as your bankruptcy period begins. In an automatic stay, creditors cannot try to collect money or other assets from you.
During this period, you work with your lawyer to restructure your debts and develop a plan to get your business back on track. This plan must be approved by some of your creditors and a bankruptcy court to go forward. You will be able to repay your debts over several years.
Filing Chapter 7 bankruptcy discharges all of your business’s debts by liquidating your assets. The entire process can be completed quickly, often in several months. Chapter 7 allows for the discharge of most debts, excluding government taxes and fines.
Only individuals can file for Chapter 13 bankruptcy. Thus, although businesses cannot file, you can file Chapter 13 as the sole proprietor of your business.
When you decide to begin the bankruptcy process, the first step is to find a lawyer who is an expert in filing bankruptcy in Tennessee. Hiring a bankruptcy lawyer can indeed be expensive, but it is worth the cost. This professional can guide you through what type of bankruptcy is best for your situation and what to expect throughout the process.
- Collect your documents: It is important to have everything from your paystubs to your credit report available before starting.
- Take the means test. This test will determine if you are eligible for Chapter 7 bankruptcy and help guide you in making a repayment plan for Chapter 13 bankruptcy.
- Meet with a credit counselor. In the state of Tennessee, most individuals must meet with a credit counselor from an approved provider before filing for bankruptcy.
- Fill out bankruptcy forms. If working with a lawyer, you can expect they will use online programs to help you file your paperwork.
- Pay your filing fee. It costs $335 to file for bankruptcy in Tennessee. Waiver of the fee is possible in some cases, but it is uncommon. However, it is possible to pay the fee in several installments instead of the entire balance upfront.
Declaring bankruptcy wipes out many debts, but not all.
What Debts are Usually Covered by Bankruptcy?
Bankruptcy can clear most unsecured debts, including:
- Credit card bills
- Medical bills
- Overdue utility payments
Bankruptcy can also clear many secured debts, but it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. For Chapter 7, you will have to give up any non-exempt items you put up for collateral. For Chapter 13, they will become part of your repayment plan.
What Debts Are Not Covered by Bankruptcy?
- Child support
- Alimony obligations
- Those related to personal injury or death in a drunk driving case
- Any debts not listed on your bankruptcy papers
No type of bankruptcy covers these debts. If you file for Chapter 7, they remain outstanding. Under Chapter 13, you pay these debts along with your other debts.
What Debts May Be Covered?
Bankruptcy rarely covers student loan debt. However, it may be in some cases with proof of undue hardship.
Tax debt is also rarely covered, but bankruptcy may cover certain old unpaid taxes.