Debt Consolidation

Medical Debt Consolidation: 4 Ways to Consolidate Unpaid Medical Bills

Health care is one budget item you can’t always predict. Emergencies happen. The average U.S. household spent $4,612 on medical care in 2016, and for many, even those with insurance, these costs can quickly add up and sink an otherwise healthy budget.

Medical debt contributes to many bankruptcy filings in America. According to the Kaiser Family Foundation, nearly one-fifth of those who have problems paying medical bills in the last year have declared bankruptcy at some point. A 2014 study from the Consumer Finance Protection Bureau found that one in five credit reports includes an unpaid medical debt that has been sent to collections. These trade lines average just $579 — and while 43 million Americans see the negative impact of medical debt on their credit scores, many of them are otherwise financially stable and pay their other bills on time.

Unpaid bills will eventually impact your credit, but thanks to new policies that took effect in September 2017, Equifax, Experian, and TransUnion won’t include medical debt on credit reports until that debt is 180 days past due. If you have unpaid medical bills, large or small, there are several ways to address what you owe so it doesn’t have a lasting impact on your financial health.

How to deal with unpaid medical bills

1. Negotiate your medical bills

Your first step when you receive a major medical bill is to review all documents carefully to ensure you aren’t paying for care you didn’t receive or that have been categorized incorrectly. Mistakes are all too common — Medical Billing Advocates of America, an organization that reviews patient medical bills, estimates that 80% of bills contain errors. Ask for an itemized bill so you can review each item you were charged for one by one.

“It’s really unfortunate that this happens to people when they are at their worst as far as being sick or probably recuperating physically from something as well as dealing with the finances,” said Thomas Nitzsche, a credit educator at Money Management International. “A lot of people just don’t have the capacity to deal with the bills coming in so a lot of times they just don’t get opened, or if they do get opened, they don’t question them.”

If you do find errors, call the provider’s billing department and your insurance company to have charges updated or removed.

The best time to prevent unexpected charges and seek financial assistance is before you get treatment, but that’s obviously not always possible.

If you are able to make a decision about which doctor you see, always choose in-network doctors and hospitals to receive the highest possible insurance reimbursement. You can compare prices ahead of time and work with your providers directly — they may have plans that allow you to make more affordable monthly payments over a longer period of time. If you offer to pay in cash, the provider may also reduce your total bill.

If you’re feeling sticker shock after you’ve been treated and receive the bill, you still have time to negotiate. Nitzsche recommends applying for financial aid through your provider, especially if a hospital is involved. If you have a financial hardship, the provider will review your situation and determine if you are eligible for a reduction in your bill — and they may even waive what you owe altogether. Even if you don’t qualify, this process delays collections activity and often extends the time you have to pay off your debt.

“In some cases, it might be enough to make monthly payment more affordable to not have to explore other options,” Nitzsche said. “If nothing else, it buys you more time.”

2. Consolidate your medical bills

If you aren’t able to lower your monthly payments after applying for financial aid and negotiating with the hospital or original care provider, you may need to explore other ways to cover what you owe. Medical debt consolidation is one option — there are several types of loans that you can use to consolidate unpaid medical bills, though each comes with certain benefits and risks.

0% intro APR credit card

One way to consolidate debt is to transfer outstanding balances onto a low or 0% intro APR credit card. Many credit card companies offer promotional rates ranging from 0% to 3.99% for six to 21 months. Once that period expires, the card’s APR may revert to a standard — and much higher — interest rate.

While it may seem attractive to quickly pay debts owed to a hospital or provider, experts caution against becoming overly reliant on low-interest credit cards. Not only do you lose the option to negotiate or apply for assistance if you haven’t already, you’ll also owe a significant amount of interest if you can’t pay off the balance of the bills you transfer to the card within the promotional period.

Personal loan

A personal loan allows you to consolidate medical bills along with high-interest credit card debt and make one payment to a single lender at a lower interest rate. They can be used for any purpose, are offered in specific amounts and generally have set monthly payments for the life of the loan. The advantage: you know what to expect and for how long.

Not all personal loans will come with affordable interest rates, however. Terms will depend on your credit score, and without any collateral to secure the loan, a lender may be less willing to offer favorable rates if your score is poor. If you aren’t able to make monthly payments on your loan, your credit will take a hit. Before you commit, use the LendingTree debt consolidation loan calculator, shop around to find the best option and make sure the payments are within reach.

Home equity loan

This type of loan is secured by the equity you already have in your home — equal to the difference between your property’s value and what you still owe on your mortgage. Like personal loans, home equity loans are awarded in lump sums with fixed interest rates. You can use the cash to settle other debts, and you pay back what you owe in monthly installments.

One major risk of securing a loan with your home as collateral is losing the property if you are unable to repay. Home equity loans also have fees attached — application and appraisal, for example — and the longer life of the loan means you may pay significant interest.

Also, keep in mind you won’t be able to deduct the interest paid on your home equity loan if you use it to pay for medical expenses.

Should you use home equity to pay off medical debts? This article will help your decision making.

401(k) loan

Some employer-sponsored retirement plans will allow you to borrow cash to pay down debt. You must follow a set application process to avoid early withdrawal penalties, and you can borrow a maximum of $50,000 or half of your balance, whichever is lower. You must pay back what you borrow with interest within five years.

While a 401(k) loan may seem faster and easier than applying to another lender, taking cash out of your retirement account means missed opportunities to let your investment grow. Plus, if you skip payments or leave your company before the loan is repaid, you may be subject to heavy taxes and penalties.

3. Get help from a credit counselor

A debt management plan is another tool to pay down debt, including medical, mortgage and credit card debt. Debt management plans are offered by nonprofit credit counseling agencies, which negotiate interest rates and fees with your creditors on your behalf and consolidate monthly payments that are then distributed among those you owe.

To enter debt management, you’ll meet with a credit counselor who will review your entire financial situation — including expenses, assets, debts and credit reports — and then submit proposals to your creditors that outline the monthly payments you’ll make in exchange for lower rates and waived fees.

Nitzsche notes that medical debt is handled slightly differently in debt management because credit counseling agencies don’t have established relationships with every medical provider the way they do with national lenders — plus most medical bills are already zero interest. A counselor will still send proposals that outline what you’ll pay for your balance each month, but providers won’t necessarily make any concessions, and some may never respond.

Most people come to a credit counselor with more than just unpaid medical bills, Nitzsche says. Some don’t enter debt management and instead negotiate payment arrangements directly with their creditors; others will take additional legal action like filing for bankruptcy. Those who do continue to work through a credit counselor can expect to be in debt management for about four years and pay a small monthly fee, typically $25-$35, to the counseling agency in addition to their debt payments.

In general, a debt management program can help you pay down debt faster because more of your payments go toward the principal amount rather than interest. It also eliminates the work required by the debtor to manage payment to multiple creditors.

Most people can expect to see their credit scores increase significantly — Nitzsche says their average client’s score goes up 100 points in the first 36 months — but it’s important to stick to monthly payments. Creditors will report missed payments, which will reflect on your credit report and score, and some may even drop your debt management agreement.

Debt settlement is another type of repayment program, but these plans are run by for-profit companies that withhold your payments until creditors agree to a settlement — a lump sum that amounts to less than what you owe. These organizations border on predatory, and although it’s illegal for them to charge fees until your debts are paid, some may try to take advantage of consumers in tough financial situations.

Debt management can provide the support to get your finances under control, but it isn’t for everyone. Those who are already struggling to cover basic needs like housing and food likely won’t be able to make regular monthly payments on their debt and may be better served by other legal options.

“Some people kind of limp along in debt management before they file for bankruptcy,” said Nitzsche. “They need it but just didn’t want to accept it.”

4. Bankruptcy

You may consider declaring bankruptcy as a last resort for managing medical debt, but it could be the most practical option depending on your financial situation. Cathleen Moran, a California-certified bankruptcy specialist at Moran Law Group in Mountain View, Calif., recommends assessing the larger impact of medical bills on your finances when considering bankruptcy.

“The first question I ask is, ‘Is the medical issue behind you?’ because bankruptcy is going to deal with whatever debts exist on the day you file, and if you’re in the midst of treatment or if you expect another surgery, that drives the timing,” she said. For some debtors, she adds, bankruptcy can be the step that keeps their financial future, including their retirement fund, intact.

Medical bills aren’t treated any differently in bankruptcy than any other type of unsecured debt, according to Moran. A Chapter 7 bankruptcy will discharge most or all of your debts, including unpaid medical expenses, so you won’t have to repay what you owe. You’ll qualify for this type of filing depending upon your ability to pass a “means test” related to your income. If you do, the whole process will last only a few months.

In Chapter 13 bankruptcy, your unpaid medical debt is again lumped in with other unsecured debt. However, with this filing, your debt will be restructured, and you’ll follow a repayment plan to settle with your creditors over the course of three to five years.

While bankruptcy sounds scary, Moran notes that debtors’ credit scores generally recover afterward because their debt-to-income ratios drop. A bankruptcy filing also becomes a less significant factor in applying for new credit as time passes even if it remains on your credit report. In Moran’s experience, those who are financially stressed often wait so long to explore bankruptcy options that they’ve already put their quality of life, financial security and retirement at risk.

“Most of the people I see have little or no capacity to ever retire the debt that they walk in the door with, and they’ve spent far too long trying to do the right thing at their family’s expense,” she said.

Should I avoid paying off medical bills in collections?

If you don’t pay your medical bills and don’t take any of the steps above, your debts will likely be sent to collections. Nitzsche recommends doing everything you can to keep your debt with the original biller — once collections agencies are involved, options for negotiating are limited.

There are several things to consider before you pay off medical debt in collections, especially if paying is a hardship. For example, if the debt is close to seven years old — which is how long negative marks stay on your credit report — settling it may not provide many benefits to your score. Similarly, if the statute of limitations on your debt has expired, it may help your score to pay it off, but you aren’t legally obligated to. If you want to tackle collections debt, start with the newest accounts first since they will be on your credit report the longest. If your debts have already made their way to collections, make sure to protect yourself from unfair debt collection practices.

The bottom line

The bottom line when dealing with medical debt, no matter which option you choose, is to be proactive.

“The sooner the better, at least for starting the process and figuring out what all the options are so you can prevent something or get some financial help,” said Nitzsche. “Even though it’s a really difficult time to educate yourself in addition to recovering from something you’ve experienced, try to get help.”


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