While loss of employment remains the number one cause of bankruptcy right now, when people lose their jobs they almost always also lose their health insurance benefits that they used to get through their employer. This often creates medical debt and it is something that often leads families and individuals to bankruptcy.

Medical bankruptcy is due to rise as the economy continues to worsen and more people find themselves without work. Bankruptcy provides an exit for people who accumulate medical debt the same way it does for those who accumulate consumer debt and are unable to pay for it.

The changes implemented in the bankruptcy code in Oct of 2005 were supposed to discourage consumers from filing chapter 7 bankruptcy and for a while it was so. It was also supposed to discourage and eliminate bankruptcy fraud. So most consumer bankruptcy files ended up as chapter 13 cases which was clearly the intention of the law changes. However, the trend did not last long. Once the real estate market began to peak in 2006, more cases were starting to be filed again under chapter 7 bankruptcy. Three years after those changes occurred the economy has taken a serious downfall causing many businesses to downsize.

Although employees who are laid off are able to take advantage of COBRA benefits, which allows someone to continue paying their insurance premiums and stay with the same health insurance carrier for up to three months. At the end of three months if the unemployed person has not found work they’re simply dropped form the plan and can not continue their coverage unless they’re able to pay for the full premium themselves, which without steady income is highly unlikely.

Unlike consumer bankruptcy, which is often made up of credit card debt and not always out of need, medical bankruptcy comes out of necessity and it may also be paid for with credit cards if medicines and office copays are required.

The U.S. healthcare system provides for a lot of bureaucracy and inflated prices that are impossible to afford for the unemployed. Although the government extends benefits to the uninsured, it typically takes a while for someone to qualify for these benefits and when medical care is needed it needs to be paid for somehow or it can not be rendered.

More people will file bankruptcy due to medical bills in the next few years as the unemployment rate continues to sore. If the medical expenses were paid for using credit cards they can be completely discharged under chapter 7 bankruptcy and if the filer is still unemployed when filing their medical debt for discharge, it is unlikely that they will be met with any obstacles or be forced to restructure the debt under chapter 13 instead.

There are very significant differences between these two types of personal bankruptcy. Under chapter 7 of the bankruptcy code, also known as liquidation bankruptcy the filer’s non-exempt assets are liquidated so that his/her creditors can be paid as much as possible before any unsecured debt can be discharged. Under bankruptcy chapter 13, the filer may be granted a debt re-adjustment, typically meaning that his/her debts will be minimized however they must still be repaid.

It’s difficult to determine on your own what the most suitable chapter will be for you, and your circumstances will be unique to your own situation, so comparing your case to others can not guarantee a definite answer. The best thing any consumer can do to figure this out is to consult with a bankruptcy attorney. Most consultations are free and normally require filling out a simple and private online evaluation form. The form you fill out will give the attorney everything they need to perform an evaluation that will not only determine if you qualify for bankruptcy, but which bankruptcy chapter you can file.

Here are some tips that can “give you an idea” of where you might be and how you may qualify for one of these bankruptcy chapters:

Chapter 7 Bankruptcy

You could qualify for chapter 7, normally if you have no income or low income in proportion to your debts. Or if you have few or no assets outside of personal belongings like clothing, home furniture and such. If after paying all your necessary living expenses you have little or no money to pay for your consumer debts, then this could also qualify you for chapter 7 bankruptcy. The thing to understand about chapter 7 primarily is that if you have a large amount of unsecured debt, you could virtually get all of it discharged if you meet the necessary requirements after being evaluated through the bankruptcy means test, which must be done by an attorney.

Also keep in mind that secured debts on the other hand, are not discharged under any chapter, they must continue to be paid for or if the debt is secured against a home or car, they must be surrendered upon discharge.

Chapter 13 Bankruptcy

To qualify for chapter 13, you must have sufficient disposable income. You must be able to prove that you will have enough income to repay the newly adjusted (reduced) debt. Typically you’ll have to come up with a repayment plan that can stretch for up to 5 years, in which you will have paid in full the agreed upon amounts of your chapter 13 repayment plan. Some of the sources you may count as income are your employment income, social security benefits, pension plan payments, wages or commissions from seasonal or contract work, welfare benefits and disability benefits among others.

If you are a business owner, you can not file under chapter 13, instead you must file under chapter 11. You can, however, file under chapter 13 as an individual and you can include business related debts that you may be liable for. Because this complicates things you must consult a bankruptcy attorney for clarification and clear direction if this is your situation.

How should you file your bankruptcy petition?

That all depends on your situation; the best advice that can be given to anyone facing serious financial stress is to take advantage of the free bankruptcy evaluations that are offered by so many bankruptcy law firms and allow an experienced bankruptcy attorney to review your case and advice which not only which bankruptcy chapter is best for you, but give you a clear picture of what you can expect after filing your case.

Please do not conclude from this article that this is a definitive guide for you to determine which bankruptcy chapter to file. This process is a lot more involved and goes beyond what this article can offer. As mentioned before, all cases are different due the unique circumstances that surround each individual.

People file bankruptcy for a lot of reasons, having tons of debt does not automatically qualify you for any specific chapter, other reasons for an individual needing to file bankruptcy include going through a divorce, having suffered a death in the family in which the primary income provider passes on and also having been the victim of identity theft and not being able to resolve the debts with creditors. All these different reasons and the specific circumstances surrounding those issues will have to be analyzed by a professional attorney in order to determine the best route.

If you are still considering filing alone, read an earlier post where I discuss filing bankruptcy alone vs hiring an attorney.

Your credit report, get it while it’s hot!

As you already know, your credit report is everything these days and you can’t do much without it. Once you file for bankruptcy, your credit rating goes out the window. This of course makes it very difficult for you to get credit again, apply for loans, rent property etc. One thing you can do prior to filing your bankruptcy petition is to get a copy of your credit report from the three credit bureaus while it’s still in good standing.

You’ll find quickly that after bankruptcy things get more complicated, but there will be times when you might encounter a company or someone who may be willing to work with you despite your current credit score. When someone is considering approving you but needs some convincing, your previous credit history could be the key to closing the deal. Of course this is not going to apply to everyone, since some people have bad credit all their lives and most creditors will simply not care how good your credit was before you filed. So these are special circumstances in which it’s important that you actually had good credit with a good score prior to filing bankruptcy, it can give you some leverage in certain negotiations.

With the current state of the mortgage market and the number of foreclosures and bankruptcy cases around the country, many people are losing their homes and in some cases voluntarily surrendering their homes to their lenders after filing bankruptcy chapter 7. Whether you willingly surrender your property or it is foreclosed by your lender, you’re going to need to live somewhere, and having a copy of your credit report prior to filing could make a difference.

Another thing to keep in mind when you go looking for a place after you leave your home is to try and stick to places that are being rented by individual owners. Apartment complexes are going to have management companies who often require the typical procedures for renting, which are a credit check, references, rent history and a long application and normally frown when they see consumer bankruptcy entries on credit reports.

Renting from a property owner who manages their own property could be a better option since they’re usually more motivated to keep their places rented. Just be honest about your bad credit and bankruptcy case when you approach them. You may find that they can be more understanding and sympathetic than a management company. Often these real estate investors will hire management companies to do this for them. These are usually smaller companies that work hard to keep a high level of occupancy and can be very flexible, you just need to ask.

If you don’t have much choice when you start looking for a place, and decide to stick to the apartment complex settings, look for places that show move-in specials like 1st month free, or 1/2 month rent for 2 months etc. These incentives are a sign that these properties have more vacancies than they’d like, so when you apply they may be willing to overlook your bad credit and bankruptcy record, and once again if you can prove to them that prior to filing bankruptcy or your foreclosure your credit was good, it’ll give them more confidence in renting to you.

Obviously once you get approved you don’t want to mess it all up by being late or missing payments. This will work against you in so many ways, since now you’re in fact working towards rebuilding your credit, so getting positive entries and good referrals are the things that you should be striving for. The last tip for making your new landlord happy is to offer to pay them rent via direct deposit, this can really increase your chances of getting approved and of course you’re creating a great referral.