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Should You File Chapter 7 or 13 Bankruptcy to Clear Medical Debt in CA?

On Behalf of | Feb 14, 2018 | Bankruptcy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy

Bankruptcy may be able to help you reduce or erase your medical debt. However, medical debts are handled differently in each type, or “chapter,” of bankruptcy in California. Therefore, it is important to understand how bankruptcy affects medical debt before you file your petition. In this article, the Roseville Chapter 7 lawyers of The Bankruptcy Group will explain some key differences between how medical debt is treated in Chapter 7, and what happens to medical debt when you file for Chapter 13. Depending on your financial resources, your long-term goals, and the amount of medical debt you’ve incurred, one chapter may be a better bankruptcy option than the other.

Chapter 7 Medical Debt Relief

Chapter 7, which is also called “liquidation bankruptcy,” is the most popular type of personal bankruptcy, not only in California but across the United States. According to federal bankruptcy court statistics, there were 486,347 Chapter 7 filings in 2017, including more than 50,000 in California’s courts.

Like debtors (people who file for bankruptcy) in Chapter 13, Chapter 7 debtors are required to meet a few federal bankruptcy requirements before filing a petition for bankruptcy. For example, it is mandatory to complete pre-bankruptcy credit counseling.

Once credit counseling and other pre-bankruptcy requirements have been successfully completed, it is time for the debtor to file his or her bankruptcy paperwork with help from a Folsom Chapter 7 bankruptcy lawyer. This includes:

  • The petition for bankruptcy.
  • Supporting financial documents that outline debts, assets, income, and other financial details.

If the court agrees to proceed after reviewing these documents, the court will randomly assign a trustee to the case. After examining your assets, the trustee may sell some of your property to your creditors (lenders to whom you owe money), which helps repay your debts. However, you can likely keep most or all of your property by strategically using bankruptcy exemptions, which our Sacramento Chapter 7 attorneys can help you evaluate carefully.

Once your debts have been repaid to the greatest extent possible, and you have completed several additional procedural requirements, the bankruptcy court will grant you a discharge if there are no issues with your case. The discharge wipes out liability for your remaining “dischargeable debts,” which are debts that can be erased in bankruptcy. Medical debts are dischargeable in Chapter 7, which means they will be wiped out at the end of your case.

During the Chapter 7, before you can receive your discharge, you may be required to pay off a portion of your medical debt. However, because medical debts are unsecured (not secured by collateral) and are not priority debts (such as child support or employee compensation), medical creditors typically receive a lower priority than many others in Chapter 7.

Chapter 13 Medical Debt Relief

Though slightly less widespread than Chapter 7, Chapter 13 is another common type of personal bankruptcy, with the federal courts reporting 294,637 Chapter 13 cases filed during 2017, including nearly 20,000 Chapter 13 filings in California. Chapter 13 is also known as “reorganization bankruptcy,” which should not be confused with Chapter 11 reorganization. (For more information about Chapter 11, which is typically used by businesses, consult with our Roseville Chapter 11 attorneys.)

Chapter 13 is very different from Chapter 7 in that, if the bankruptcy unfolds smoothly, none of your assets are at risk of liquidation. However, there’s a catch: in Chapter 13, you must agree to a long-term repayment plan, called a “plan of reorganization,” which requires you to use your disposable income to make recurring payments over a period of three to five years. This is where the term “reorganization bankruptcy” comes from.

If you follow the terms of your reorganization plan, and satisfy all other bankruptcy requirements, the court should grant you a discharge, similar to the Chapter 7 process our Roseville Chapter 13 bankruptcy lawyers described in the previous section. The discharge will wipe out the remaining dischargeable debts at the end of your reorganization plan. Medical debts are dischargeable in Chapter 13, which means that when you have finished your plan, your outstanding medical debt can be erased.

Sacramento and Roseville, CA Bankruptcy Lawyers Can Help You Get Rid of Medical Bills

Don’t rule out bankruptcy as an option until you have discussed your financial situation with an experienced Folsom Chapter 13 attorney. If you feel as though you are drowning in medical debt, it may be the right time to consider Chapter 7, Chapter 13, or potentially individual Chapter 11. In addition to lowering or eliminating your medical bills, bankruptcy can also help you keep valuable property, avoid utility shut-offs, get more time to pay off loans, and begin the process of improving your credit score. For a free legal consultation with an experienced Roseville bankruptcy lawyer from The Bankruptcy Group, contact us online, or call our law offices today at 888-710-4334.