It's a common saying: Many Americans are just one major illness away from bankruptcy.
In fact, the cost of health care contributes to many bankruptcies. But a bankruptcy caused solely by medical bills usually involves a serious illness or injury that hits a person who is uninsured or lacks adequate health insurance, says Kevin Heupel, a Colorado bankruptcy attorney and debt-relief expert.
In 2013, just over one million bankruptcies were filed in the United States. According to the Kaiser Family Foundation (KFF), medical debt is a factor in more than half of U.S. bankruptcies.
Even patients with good health insurance can end up filing for bankruptcy. A 2014 report by the KFF found that cost sharing for in-network services, higher cost out-of-network care, health plan limits or exclusions and other factors caused burdensome medical debt for some patients with insurance.
The report also found that patients with high deductible plans were more likely to have a problem paying medical bills.
So, what can you do if you're drowning in medical debt and want to file bankruptcy? Here are nine steps to take.
9 steps you should take if you file for medical bankruptcy
1. Meet with a bankruptcy attorney.
The first step is to make an appointment with a bankruptcy attorney who can explain the ins and outs of bankruptcy and help you decide if it's the right option for you, Heupel says. You can find an attorney by using a search tool from the National Association of Consumer Bankruptcy Attorneys. The lawyer will be able to tell you if you qualify for Chapter 7 bankruptcy, which is the most common type and usually the best choice for a consumer overwhelmed by medical bills, as it will wipe out the debt, Heupel says.
If you earn less than the median income for your state, you automatically qualify, Heupel says. If not, your eligibility will depend on your amount of disposable income, which is your income minus expenses you’re allowed to deduct.
In some cases, such as with groceries and utilities, you can deduct an amount determined by the government and based either on local or national averages. In other cases, such as with health and life insurance, you can deduct the amount you actually pay. "It can get complicated," Heupel says.
2. Get credit counseling.
Before you can file bankruptcy, you must complete a credit counseling session in person, on the phone or online with an agency approved by the U.S. Trustee Program, which oversees bankruptcies. The counselor will go over your financial situation, help you create a budget and discuss alternatives to bankruptcy, says Steven Wieckowski, a bankruptcy counselor with GreenPath Debt Solutions.
3. Look at other options.
You might be able to avoid bankruptcy by working out a payment plan with your creditors, Wieckowski says. Or, you could make offers to your creditors to settle your debt for a lump sum that is less than you owe, says Sandee Ferman, author of "How to Settle Debts Yourself." When Ferman ran a debt-settlement company, she helped a man whose heart problems had left him with $25,000 in debt, which he settled for $5,000. The key to settling with a hospital is to be polite, be honest about your hardship and be persistent, she says.
One warning, though: Before deciding to try to settle debt, meet with a tax expert, Wieckowski says. You could owe income tax to the IRS on any forgiven debt.
4. Start looking for new medical providers.
When you file for Chapter 7 bankruptcy, it means you won't be paying that big doctor bill you owe. So, it's important to know that your doctor or other health provider might drop you as a patient, says Tiffany Franc, a Maryland-based bankruptcy attorney. Start looking for a new place to get care, she recommends. Or, if you really want to stay with the same doctor or facility, see if you can work out a payment plan outside of the bankruptcy, Franc says.
5. File bankruptcy.
Once you've provided your lawyer with proof of income, records of your medical bills and other documents, he or she can file bankruptcy for you. If you don't qualify for Chapter 7 but you've had a medical crisis, your lawyer might be able to file Chapter 7 anyway due to a loophole in the law for "special circumstances," Heupel says. "It's a case-by-case basis," he says. If that doesn't work, your lawyer might recommend filing Chapter 13 bankruptcy, in which you create a plan to pay off all or some of your debts over a period of three to five years, he says.
6. Meet with your creditors.
By federal law, you're required to go to a meeting with the bankruptcy trustee assigned to your case, and your creditors can attend and ask you questions. "That's the worst part of filing, the most intimidating," Franc says. But don't worry: Creditors often don't show up, she says.
7. Take a debtor education class.
You must take a class -- online, by phone or in person -- before your debts can be discharged, Wieckowski says. At that time, the bankruptcy counselor will go over your budget in detail. If you have a chronic condition like diabetes or a serious illness like cancer, the counselor also can refer you to resources such as RxAssist.org, an online database of patient assistance programs, he says.
8. Discharge your debts.
If you filed Chapter 7 bankruptcy, you will get a discharge order by mail, usually within about 90 days after filing, Heupel says. "At that point, (the person filing for bankruptcy) can get a fresh start," Franc says.
9. Rebuild your credit.
A Chapter 7 bankruptcy stays on your credit report for 10 years, Heupel says. But that doesn't mean your credit is ruined. By opening and paying bills diligently, you can rebuild your score. If you apply for a traditional card and you’re denied, you can open a secured card, which requires making a deposit with the card issuer, (typically the amount of the credit limit).
Experts say it’s important to make sure the issuer of a secured card reports to the major credit bureaus. In many cases, it’s possible for a consumer who has gone through bankruptcy to achieve a credit score in the low 700s in about a year. "But it does take work," Heupel warns.