Medical debt is a significant issue for many Americans. Large medical bills can be very burdensome, especially for those who are struggling with health issues that may affect their ability to earn an income. In fact, medical debts are one of the most common reasons that people file for bankruptcy. To make matters worse, these debts can continue to affect a person for years, even after debts are paid off or eliminated. A debt that is in collections will often show up on a person’s credit report, lowering their credit score and affecting their ability to receive credit or loans in the future. Fortunately, the credit reporting agencies have announced new policies that may benefit those who have medical debts.

Changes to Medical Debt on Credit Reports

The three credit bureaus that maintain records of people’s debts--Experian, Equifax, and TransUnion--have announced that they are changing some policies related to medical debt. As of July 1, 2022, medical debts that have been paid off will no longer be included on a person’s credit report. This will affect any new debts that are paid off, as well as past medical debts, even those that had been in collections. Because many medical companies are willing to negotiate with consumers to reduce the amount owed, those who have debts may be able to pay them off, ensuring that these debts will not affect their credit score in the future.

In addition to this change, the credit reporting agencies will also be allowing more time before medical debts are included in a person’s credit report. Previously, debts would be reported if they were in collections for more than six months. This period has been extended to one year, giving people more time to address their medical debts and pay them off before these issues affect their credit.

There are many situations where people may struggle with debt, and this often occurs due to circumstances that are out of a person’s control. Those who are experiencing harassment from creditors and struggling to cover their ongoing expenses in addition to paying what they owe will need to consider their options, and in many cases, bankruptcy can provide an ideal solution. By completing this process, a person, family, or small business owner can eliminate certain types of debts and regain financial stability. However, debtors who are considering bankruptcy may need to be aware of some recent changes to the laws that may affect their eligibility for debt relief based on the amount they owe.

New Debt Limits for Chapter 13 Bankruptcy

Chapter 13 bankruptcy, also known as “wage earner’s bankruptcy,” is an option that may be pursued by debtors who own a home and wish to avoid foreclosure or who do not want to liquidate certain assets during the bankruptcy process. This type of bankruptcy will allow unsecured debts such as credit card balances, medical bills, and missed mortgage payments into a single repayment plan. Depending on certain factors, this repayment plan will last either three or five years, and after a person has made all monthly payments in the plan, any remaining unsecured debts will be discharged.

The U.S. Bankruptcy Code defines certain limits for the amount of debt a person can have in order to qualify for Chapter 13. This limit was increased recently by the passage of a federal law, the Bankruptcy Threshold Adjustment and Technical Corrections Act (S. 3823). Previously, the Bankruptcy Code distinguished between secured and unsecured debts when determining the debt limit. However, under the new law, a debtor will qualify for Chapter 13 if the total amount of their secured and unsecured debts is less than $2.75 million. This may allow more people to qualify for a wage earner’s bankruptcy. Those who have debts in excess of this limit may need to file for Chapter 7 bankruptcy, which has no debt limits.

People or families who are struggling with debt may find that bankruptcy is their best option. Filing for bankruptcy will force creditors to stop any attempts to collect debts that are owed, and it may also put a halt to foreclosure proceedings, wage garnishment, and repossessions of vehicles or other property. When a debtor completes the bankruptcy process, some or all of their debts may be discharged, meaning that they will no longer have the obligation to repay the amount owed to creditors. However, it is important to follow the correct procedures during the bankruptcy process, since failure to do so may result in the dismissal of a case, which will allow creditors to resume their collection efforts.

Reasons for a Bankruptcy Dismissal

During a bankruptcy case, creditors may ask for a dismissal if they believe that a debtor committed violations of bankruptcy laws. The bankruptcy trustee may also take action to dismiss a case if the debtor fails to meet certain requirements. Reasons why a case may be dismissed may include:

• Failure to pay filing fees - A debtor is required to pay certain fees and court costs when filing a bankruptcy petition. If they do not pay these fees as required, the court may dismiss their case. If a person does not have the financial means to pay filing fees, they may be able to apply for a waiver that will allow them to proceed with the bankruptcy process without meeting this requirement.

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There are many types of debts that may cause a person to experience financial problems. When it becomes difficult or impossible to repay debts, bankruptcy may be the best option for avoiding serious consequences, such as a home foreclosure, the repossession of property, or legal judgments that may result in wage garnishment or liens against a person’s home. However, it is important to understand how different debts will be addressed during the bankruptcy process. Domestic support obligations such as child support or alimony are one type of debt that may need to be considered.

Domestic Support Obligations Are Priority Debts

While domestic support obligations are considered to be debts owed by the payor to the recipient, they are treated differently than other types of debts. Financial support paid by a person to provide for the needs of a child or ex-spouse may be necessary to ensure that the recipient can cover their ongoing living expenses. Because of this, a person will generally be required to continue making payments, and they will also be obligated to make up any payments that are past due.

After filing for bankruptcy, an automatic stay is implemented that requires creditors to cease any attempts to collect debts from the debtor. However, this automatic stay does not apply to domestic support obligations. A person must continue making any child support or spousal support payments that are required. 

Originally published: July 20, 2020 -- Updated: March 18, 2022

Update: Florida homeowners will want to understand exactly how the homestead exemption may be used in cases involving bankruptcy or foreclosure. The Florida State Constitution states that a property that is considered a homestead will be exempt from “forced sale” based on debts that are unrelated to the property itself. That is, a creditor who is seeking repayment for another loan, such as the balance on a credit card, may not place a lien on a debtor’s home. However, a mortgage lender will have the right to pursue foreclosure if a homeowner defaults on their loan. Unpaid property taxes may result in tax liens, and a mechanic’s lien may be placed on a home if a contractor is not paid for work performed on the property.