Drowning In Medical Debt? Filing For Bankruptcy Could Be Your Life Raft


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Today’s issue of The Record tells the story of Frances Giordano, a 58-year-old diagnosed with lung cancer last year.

After losing her job in December—days after completing a round of  chemotherapy, no less—now she’s getting treatment without health insurance and is drowning in medical debt as a result. 

Giordano isn’t alone: Nearly 44 million Americans are paying off medical bills, up from 8 million in 2005, said the Commonwealth Fund.

For many of them, filing for bankruptcy is a last, but necessary resort. 

In 2010, one in five American families were having trouble paying off their medical debt, while 25 per cent considered filing for bankruptcy, according to a December 2011 report by the centre for Studying Health System Change.  

Hamid Soleimanian, a bankruptcy lawyer in California, told Your Money filing for Chapter 7 bankruptcy to resolve medical debt is not uncommon.

“Medical bills are one of the top three reasons that people file for bankruptcy,” he said.

But before you sign up, do your homework. 

“It’s often a misconception that filing for bankruptcy will hurt your credit,” Soleimanian said. “Although it’s true that the filing of bankruptcy will stay on one’s credit history for up to 10 years, the credit score can go up as shortly as a year later, and sometimes by up to 100 points.” 

Bankruptcy filers will also need to meet certain qualifications that vary state-by-state. Since their eligibility depends on factors like the size of their household and annual income, they’ll need to check with the Internal Revenue Service to see if they qualify.

You’ll also want to time it right. 

“The income is determined by what the person made during the last six months before filing,” Soleimanian said.

Today, a person living in a one-person household can file if their gross income is less than $47,683. So if that person lost his or her job today and their income exceeded that amount, the IRS would examine their former income to determine whether he or she qualifies.

It’s easier to qualify for bankruptcy if you’ve charged all your medical bills to your credit card. This proves the money was paid to the hospital, deeming it a legitimate expense, Soleimanian said.

Regardless of your ongoing bills, know that filing for bankruptcy isn’t the end-all be-all for those who require ongoing treatment. Giordano will likely have to continue making her copayments, deductibes and other bills, and as these are costs that affect those with or without insurance.

Unfortunately, for patients like her, the Affordable Care Act, which could help reduce medical costs by providing subsidies for insurance coverage, will not fully go into effect until 2014.

Now read about 6 ways you can trash your credit score >