4 Ways to Deal With Medical Debt

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Medical debt can be crushing: 43 million Americans have overdue medical debt on their credit reports. If you have health insurance, the deductibles can be high: For families with a bronze health plan, the average deductible is $10,545. Given that 62 percent of Americans do not have enough money saved to handle a $500 emergency, medical debt can quickly become a big problem.

The problem is even worse for the 12.9 percent of people who do not have health insurance. If you enter an emergency room without insurance, you are going to be charged obscenely high rates. It is not uncommon for people to leave the hospital with $100,000 or more in medical bills. If you find yourself in a medical emergency, here are four things to consider to help manage the situation.

1. Try to Reduce the Bill When It First Arrives

If a big hospital bill arrives that you cannot afford, you should immediately try to negotiate the rate down. Nonprofit hospitals are required to offer financial assistance programs. But even for-profit hospitals are often willing to agree to a payment plan. But you need to talk to the hospital right away to take advantage of any program that it offers.

Professional, for-profit companies will negotiate your medical bill on your behalf. They will often charge by taking a percentage of your savings. You may want to shop around and hire someone to help you negotiate, if you don't feel comfortable yourself.

2. Negotiate a Full and Final Settlement With a Collection Agency

If you do not pay your bill, the hospital or doctor often turn over that debt to a collection agency. The agency will put a negative record on your credit report and begin calling you. The negative item can have a big impact on your score.

Once a medical debt is placed on your credit report, the damage is done. Whether you pay off the debt or not, the impact to your credit score will be the same. In other words, there is no benefit to your score to pay the bill. This will be changing with FICO 9, but for now paying off the debt will not improve your score.

The debt collection agency can sue you and garnish your wages. Paying your debt will not improve your credit score, but it may help you avoid being sued.

If you plan on paying the debt collection agency, you should negotiate hard and agree to a full and final settlement. Most collection agencies want to get you to sign up to a monthly payment that will last forever. But your goal should be to agree a full and final payment that ends all future collection activity. And make sure you get any deal in writing, before you pay.

If you can't afford a lump-sum payment, try to negotiate a reduced sum and monthly payments. And get that in writing -- including the end date of the settlement -- before you start paying.

3. If You Need Financing, Look for the Lowest Interest Rate

Doctors usually offer financing, but usually at very high interest rates. There are two options to get the lowest interest rate.
  • Consider opening a credit card with a 0 percent purchase offer. One of the best deals around is from Citi, which offers 0 percent for 21 months on purchases with Citi Simplicity. If you apply and make the payment with that card, you will have 21 months to pay off the medical debt with no interest. However, you need excellent credit to qualify.
  • You can also consider a personal loan. Interest rates can be as low as 4.25 percent. With most lenders, you can check your rate without hurting your credit score. You can have the cash deposited into your checking account and then pay the hospital directly. You can find a list of personal loan companies at MagnifyMoney, my website.
Don't rush into a high-interest loan to pay a medical bill. Once you get into payday or title loan traps, they can be incredibly difficult to escape. It is much better to buy yourself time by negotiating with the hospital. In parallel, you should look for lower cost ways to finance the emergency.

4. Remember That Bankruptcy Is an Option

Medical debt can usually be extinguished with bankruptcy. For some people, this may be the best option if the hospitals refuse to reduce its pricing. For example, a Reddit user described a situation where he made $40,000 annually and had over $200,000 of medical debt. He had paid $30,000 of the debt using his emergency savings. And the hospitals refused to reduce the total bill.

If your medical debt is more than 50 percent of your annual gross income, you should consider bankruptcy. And if your debt is more than 100 percent of your salary, it may be your only viable option.

But, before filing for bankruptcy, you should let the hospital know that you are going to file bankruptcy. At that point, the hospital may negotiate for something then, rather than getting nothing later.

Bankruptcy should not be taken lightly. Your credit score will be destroyed for years. And the law will make it nearly impossible if you can actually afford to pay the medical debt. Bankruptcy is best positioned for people who will never be able to pay off their medical debt.

And Buy Health Insurance

If you don't have health insurance, you are taking a very big risk. You can no longer be rejected for pre-existing conditions. Although the monthly insurance premiums may be high, the cost of a big medical emergency can be catastrophic. Even a high-deductible plan is a better way to protect against a big, unexpected risk than having no insurance at all.

Nick Clements is the co-founder of MagnifyMoney, a price comparison and financial education website. You can follow him on Twitter @npclements.
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