Common causes of medical debt

The leading causes of medical debt in the U. S. are the loss of a job with medical benefits and lack of health insurance.  The government estimates that almost 50 million people currently have no insurance.  For those that can afford insurance, many have opted for large deductibles which require upfront cash before the insurance kicks in.  As the economy has weakened over the past several months and millions of jobs have been lost, this situation has only gotten worse. 

To compound the problem, many people that lose their jobs and lose their benefits cannot afford to purchase insurance on their own.  In addition, the cost of medical care has skyrocketed as the technology has improved, resulting in new equipment and procedures that cost hundreds of thousands of dollars.  Hospitals and doctors are recovering those costs through escalating fees that have driven insurance premiums through the roof.

For those who have no insurance, the burden of huge medical expenses has caused many to use their credit cards to pay the bills, subjecting them to exorbitant finance charges.  This further compounds their debt problem, putting them into a never-ending spiral of increasing debt.  Large medical debts often deter people from seeking needed medical care which can often result in the need for more expensive care in the future.  Since Americans are now living longer than ever, the debts can compound over time to the point where many people cannot pay them.

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How it differs from regular secured and unsecured debt

Medical debt is unsecured since you do not pledge collateral in order to receive medical treatment.  In almost all cases, you receive the treatment before you are required to pay the bill.  Doctors and hospitals are relying on you and your insurance to pay all the bills.  Should the bills fail to be paid, medical providers must now attempt collection on their own or through a collection agency.  They cannot take your home or assets in order to force payment since there is no security for payment.  However, if the creditor secures a court judgment against you for unpaid debts, a garnishment could be placed on your wages.

Most unsecured debt, including medical expenses, can be completely discharged through bankruptcy.  This is a distinct advantage to the consumer over secured debt, which usually requires a sale of assets in order to pay the debt.  However, bankruptcy transfers the costs for such healthcare onto the backs of those who do pay their bills, and has contributed to the significant escalation in medical costs.

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How medical debt is reported and affects your ability to get insurance

Failure to pay medical bills will affect your credit rating and could make it difficult or impossible to purchase medical insurance and obtain loans for any purpose.  There is a normal three-step process that most medical providers will use when dealing with bad debts.  First, they will generally write off the bill if they have not received payment within 180 days.  Second, they will sell or assign the debt to a collection agency, usually for an amount less than what you actually owe.  Third, the collection agency will attempt to gain all or partial payment from you on the delinquent account.  Their profit consists of any amount collected above what they paid for your account.

In addition, the agency will notify the three major credit bureaus which will be reflected on your credit report.  At that point, financial institutions and insurance companies have almost instant access to your credit history, which will directly impact your ability to get new credit.  If at some point you do pay off the debt, either in full or by settlement, it’s critical that you take swift action to ensure that your credit report is updated to reflect that fact.

Debt solutions tailored to medical debt

If you have any insurance, make absolutely sure that your provider is paying 100% of the coverage limits established in your policy.  Your doctor’s office should assist you in making sure the insurance company has all the necessary forms and medical reports necessary to fully document your claims.  You should also pursue the possibility of establishing a payment plan with your doctor or hospital for amounts not covered by insurance.  Many will offer this option if you can’t pay the bill all at once.  If the payback period isn’t too excessive, some will even do this without charging interest.

medical debtAnother preferred option is to seek a full settlement of your medical debt.  Because most doctors are very busy and have thriving practices, this increases the likelihood of settling medical debt more easily than other debt.  The simple fact is that most doctors do not want to spend their time and money suing you.  This would only add to the time they lost while treating you without payment.  They are far better off using their time to treat other paying patients and settling with you for something less than the actual bill.  Many will do so in exchange for a lump sum cash payment based on a percentage of the bill.  While every case stands alone, a target range is 35-65% of what you owe.  Reaching a settlement avoids never-ending lawsuits, restores your peace of mind, and may potentially keep you as a customer if your financial condition subsequently improves.

Other options include a debt consolidation loan and credit counseling.  If you have sufficient equity, a home equity loan currently offers low interest that is tax deductible.  You should avoid using credit cards to pay off medical bills since this just adds more debt that will incur huge finance charges.

Government assistance for medical debt

The government has financial aid programs to help pay for your medical expenses.  U. S. citizens can apply for health care grants that do not have to be paid back, and they are available even if you have bad credit or declared bankruptcy.  If you meet the qualification criteria, Medicare and Medicaid are available to pay a significant portion of your healthcare expenses.  Some state and local governments also have aid programs to help those who can prove financial need.