Medical debt is a widespread problem in America. The Urban Institute says 13% of households in Los Angeles County have medical debt in collections, and that’s the good news. In other areas of the country, the problem is much worse. The national average is 18%, and in many areas the picture is even bleaker. In some counties around the country, more than 40% of households have medical debt in collections.
Still, having a lower-than-average rate of medical debt in collections doesn’t mean all is well in L.A. County. The U.S. Census Bureau estimates that there are 3,506,903 households in the county. At 13%, that means more than 455,000 local households have medical debt in collections. And, the percentages are higher in neighboring areas such as Kern and San Bernardino counties.
Any delinquent debt can be stressful, but medical debt is often especially anxiety-inducing, for a variety of reasons. First, people who are facing a medical crisis or who require ongoing medical care can’t afford to be without access to the doctors and medical facilities they rely on. Second, since large medical bill often go hand in hand with short or long-term disability or physical limitations, mounting medical debt is often paired with loss of income. Finally, unlike most other forms of debt, medical debt is typically not chosen. Medical debt often comes as a surprise, and may affect people unaccustomed to being in debt or being unable to pay bills as they come due.
Unfortunately, those combined stressors often lead people to make poor financial decisions in an effort to resolve medical debt. Some common mistakes include:
Paying medical debt with credit cards
While access to necessary medical care is critical and using a credit card may be a reasonable last resort for someone who can’t see a provider without making a payment he or she can’t afford, the use of credit cards to pay medical debt extends far beyond that limited circumstance. NerdWallet used data from its 2017 American Household Credit Card Debt Study to estimate that up to 27 million U.S. adults used credit card to pay medical expenses, for a total of about $12 billion. These consumers paid an average of $471 per year in interest on those charges, though much of the underlying medical debt would have been interest-free.
Putting debt you can’t afford to pay on a credit card can magnify the impact on your credit score and access to credit, as well. That’s partly because using too much of your available credit has a negative impact on your credit score, and partly because of the way different types of debt are reported. A delinquent credit card payment is typically reported as soon as it’s 30 days past due, whereas unpaid medical debt does not appear on your credit report until it is 180 days past due.
Using home equity to pay off medical debt
Taking out a second mortgage, refinancing, or using a home equity line of credit to pay off large medical bills may seem like an obvious solution. Using home equity to cover the medical debt can transform delinquent debt that is affecting your credit and triggering high-pressure collection efforts into a predictable monthly payment. And, although most original medical debt is interest-free, the interest rate on a mortgage loan will typically be significantly lower than that on a credit card or other loan a consumer might use to pay off medical bills. The problem is that another transformation takes place as well: unsecured medical debt becomes debt that is secured by the debtor’s home, dramatically increasing the consequences if the debt is unpaid.
Refinancing can even put value in your home that would otherwise be exempt at risk, since the homestead exemption doesn’t apply to the mortgagee. So, equity in your home that would have been protected if the medical provider sued you for the unpaid balance may be on the line after a refinance.
Cashing in retirement accounts to pay medical debt
A medical crisis may allow for early withdrawal of retirement benefits or a loan against retirement funds. For many people in dire straits, using those funds to clear medical debt seems the obvious solution. However, there are significant downsides to relying on retirement accounts prematurely. First, depending on factors such as the type of retirement account, the age of the account, and the circumstances prompting the withdrawal, using retirement funds to pay medical debt may result in a significant tax penalty. More importantly, using a chunk of retirement funds to pay off medical debt can leave the consumer in a precarious situation later—especially if the medical condition responsible for the bills is likely to impair earning capacity in the future.
Of course, this is just a high-level overview of some of the possible pitfalls associated with these go-to methods for paying off debt. Neither the list itself nor the discussion of possible risks is exhaustive. The right solution for you will depend on a wide variety of factors specific to your situation, including your income, assets, other debts, age, access to medical care, and ability to return to work.
Bankruptcy and medical debt
Medical debt is typically unsecured debt, which is dischargeable in Chapter 7 bankruptcy. For those who qualify, wiping out large medical debt through Chapter 7 can provide a fresh financial start after a serious illness or injury. If your income is too high to qualify for Chapter 7 bankruptcy, or you have non-exempt assets you want to keep, a Chapter 13 plan may allow you to spread that debt out over three to five years and perhaps discharge remaining debt at the end of that period.
To learn more about whether bankruptcy might be the right solution for you, call 877-328-1497 for a free consultation.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.