Medical debts account for nearly 62% of all bankruptcy cases filed according to a Harvard study. The actual number may be even higher since medical debts turn into credit card debts and mortgage debts as people try to pay off debt collectors. Although some medical debts are incurred when a person is temporarily uninsured, many are a result of ongoing medical conditions that continue throughout the bankruptcy case.
It is amazing to see how much medical debt can be acquired even when a person has insurance. Some deductibles are high and it seems like most consumers do not know how to respond when the claim is denied. Many treatments are not fully covered and medical supplies for diabetes and other conditions are just not covered very well under most policies.
This problem is especially heightened when new medical debts are incurred during a bankruptcy case. Generally speaking, bankruptcy cases only cover those debts you owe on the day the case is filed. Although Chapter 7 cases are completed in about 100 days, a Chapter 13 case can last up to five years and it is common for debtors to incur substantial new medical debts during the case.
What can you do when new medical debts are incurred during a bankruptcy case?
- Convert the case to another bankruptcy chapter. Chapter 13 cases can be converted to Chapter 7 in most cases. Some special rules apply, but if you were eligible to file chapter 7 on the day the chapter 13 case was filed you probably can convert the case to chapter 7 now and add all the new medical debts.
- Dismiss & Refile. I have seen cases where a client suffered significant medical debt a few weeks after filing a case. You do have the right to dismiss the current case and start over.
- Negotiate the Debt. While you are in the middle of a bankruptcy case a creditor cannot garnish wages or bank accounts. Some chapter 13 cases last for up to five years. Since creditors prefer not to wait, request a discount on the amount owed in exchange for a payment now.
Converting a case from chapter 13 to chapter 7 can create problems if car and loans have not been paid in full or if the chapter 13 plan deeply discounted the interest rate of the car loan. It is common for chapter 13 plans to reduce interest rates from 18% down to 5.25%. (Secured auto debts in chapter 13 cases only pay the Prime Rate plus 2%). So, when a case converts to chapter 7 the benefits of the chapter 13 plan vanish and the auto lender may demand the loan be made current at the original contract rate. Be careful in assuming that the car is safe when you convert the case. Sometimes it is wise to call the auto lender before converting the case to see what the new payment will be or if a large cure payment must be made.
When chronic medical problems exist and health insurance coverage is spotty, it is generally wise to file chapter 13 to take advantage of the ongoing protection from medical creditors. If major surgeries are planned in the near future, perhaps it is best to start the bankruptcy as a chapter 13 case with the idea of converting to chapter 7 later just in case some of the medical bills are not covered by insurance.
Image courtesy of Flickr and Chuck Olson.