Medical debt and credit score troubles

On Behalf of | Oct 1, 2023 | Bankruptcy |

Medical debt could bring both unexpected and enormous expenses. An uninsured or underinsured person may face immediate medical bills, rehabilitation costs, and more to treat a condition. Mounting debt and subsequent adverse credit reporting could cause significant harm to someone’s credit score. Proposed federal regulations might alleviate the problem.

Proposed changes to credit score regulations

The Biden administration has proposed rule changes that would hide medical debt from credit reports. Poor credit scores could affect someone’s ability to receive a loan and have a negative ripple effect. For example, a background check revealing poor credit might cause someone to lose a chance at a preferred apartment. Millions of people may benefit from their directives if the rule changes go through.

Although there could be substantial benefits to a more favorable credit score, debtors must still address their medical obligations. Any payment plans provided by the hospital might not be enough, as the debtor may have incurred other debts beyond medical ones. Defaulting on such obligations may lead to lawsuits. Filing for bankruptcy could provide an effective way to deal with insurmountable debt.

Bankruptcy and medical indebtedness

Under bankruptcy laws, collection actions stop, and the debtor can propose a plan to repay restructured debt. This process occurs under Chapter 13 bankruptcy, often called wage earners bankruptcy. Some debt would face a discharge, possibly including all or some medical debt. The plan requires repayment in 3 to 5 years.

Those able to handle a payment plan may explore liquidation bankruptcy. Chapter 7 requires the debtor to pass a means test to qualify. Those who do would liquidate non-exempt assets to pay certain debts. The court would likely discharge other specific debts, freeing the bankruptcy filer from any obligations to pay.