How to Avoid Medical Bankruptcy

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The emotional and financial strain of medical bills can feel overwhelming, and you might consider filing for bankruptcy. However, bankruptcy comes with significant financial costs — both in terms of dollars spent and lasting effects on your credit. Before filing for bankruptcy due to medical bills, determine whether it really makes sense or if you can try other strategies, such as negotiating your bill, paying in installments or borrowing money.

This article will cover:

What is medical bankruptcy?

The phrase "medical bankruptcy" is an unofficial term that describes a bankruptcy where medical debt is a main reason for filing. It isn’t a legal term or a specific type of bankruptcy you can file in court.

Although there isn’t a bankruptcy classification specifically for medical debt, you can file bankruptcy for any debt, including medical bills. This is typically done as a last resort, since bankruptcy carries long-term implications for your credit.

What happens if you cannot pay medical bills?

If you’re saddled with medical debt and are unable to pay it, the health care provider may send your account to its internal collections department or sell your debt to a third-party debt collection agency.

Debt collectors may reach out to you multiple times using various methods, like phone calls, emails and text messages, in an effort to collect the debt. If the medical bill continues to go unpaid, the collector can sue you in an effort to collect the past-due debt.

In the meantime, the unpaid medical bills may be reported to the credit bureaus. Medical bills that are in collections are noted on your credit report and can negatively affect your credit score.

Even after it has been reported to the credit bureaus, you’re still liable for the debt. Although filing for bankruptcy for medical bills may get the debt discharged, it will not result in a clean slate for your credit report.

Types of bankruptcy

For individuals, there are two types of bankruptcy available, depending on your situation: Chapter 7 and Chapter 13. We can’t say which type of bankruptcy is more common for those with large medical debts, but data from the United States Courts system shows that more than 61% of people filed for Chapter 7 bankruptcies in 2017, compared to 38% filing for Chapter 13.

Chapter 7

If you can’t make regular monthly payments toward your debt, Chapter 7 liquidates all of your nonexempt assets and uses that money to repay your creditors, including outstanding medical debt. At the end of a Chapter 7 bankruptcy, you’ll no longer be liable for certain discharged debt from your bankruptcy case and creditors can no longer take further actions to collect.

Chapter 13

Chapter 13, on the other hand, is an option for those who have regular income. It works to adjust the debt you owe with the goal of creating a repayment plan for some or all of your debt.

In this situation, you can keep your property with the understanding that you’ll make installment payments to your creditors within three to five years. In some cases, certain debt may be discharged during Chapter 13 bankruptcy.

Regardless of which type of bankruptcy you look into, medical bankruptcies can take a financial toll on your credit. For Chapter 13, it can take seven years for the bankruptcy to fall off of your report. Chapter 7 stays on your record for 10 years.

How to avoid medical bankruptcy

Being proactive about your medical debt and financial situation is key. Before turning to bankruptcy due to medical bills, find out if these tips can help ease your financial hardship.

Negotiate medical costs before you pay

One of the most difficult things about medical expenses is that you almost never know how much you owe until after getting a life-saving procedure or taking a prescription to the pharmacy. If you have a high-deductible health plan, you’re even more susceptible to incurring high costs from doctor’s visits because you have to pay out of pocket before insurance kicks in.

So while it is not always possible, it’s advisable to research the cost of a non-emergency procedure and compare prices at several providers, if you have the time. This is especially helpful if you have to pay out of pocket for it.

Not all providers charge the same rate. To gain some leverage when negotiating with your doctor’s office or hospital, you can use sites like Healthcare Bluebook. It’s a free online tool to see the fair market price for health services in your area.

Negotiation can take place before or after you’ve received treatment. Ideally, this conversation happens beforehand. This way, if your provider refuses to meet you at a mutually agreeable number, you can either ask about alternative care options or research a more affordable provider. If you need to be treated urgently, you may have to negotiate a lower price after you’ve received care. Explain that you can’t afford to pay the bill, note what the average price for the care is in your area and see if they’re willing to lower the amount on the invoice.

Work out a payment plan with your provider

If you’re facing a large medical bill after receiving care, see if your provider has interest-free payment plans available. Getting on a payment plan can help make your monthly medical expenses more manageable.

As much as possible, avoid using credit cards to pay medical bills. A credit card only buys you so much time until you’ll need to repay the entire statement balance, plus interest.

Build an emergency fund

Being prepared for the unexpected is the best way to avoid bankruptcy. An emergency fund can help you tackle emergency bills and or medical treatment costs so you’re not left relying on credit to keep you financially afloat.

Automating your savings can help you get started so you don’t have to remember to set money aside every month. You can ask your HR department at work if they can automatically direct deposit a certain amount of your paycheck to your savings fund each paycheck, or you can set this up directly through your bank.

Enroll in a health savings account

A health savings account is a tax-advantaged savings account specifically for qualified health and medical expenses. You can contribute to an HSA as long as you’re enrolled in a high-deductible health plan.

For 2019, individuals may contribute up to $3,500 to an HSA, and the contribution for a family HSA is $7,000. In 2020, HSA contribution limits increase to $3,550 for self-coverage and $7,100 for family coverage.

Review bills carefully for errors

As with any type of bill, mistakes happen — whether it’s because your insurance company processed an incoming claim incorrectly or your provider double-billed you for the same visit. It’s important to thoroughly read your bill to make sure every charge is correct and know what your health insurance policy covers.

Your insurer is legally required to send you a Summary of Benefits, which explains in simple terms what your coverage looks like. It can seem like a lot of text to read through, but being knowledgeable about the policy you’re paying for can help you stay on top of medical bills.

Sell your assets

If you’re hard-pressed for cash, one way to avoid bankruptcy due to medical bills is to sell your property and downsize your lifestyle. This can include selling high-value electronic devices, like a computer or smartphone, or selling your luxury vehicle and replacing it with a reliable used car.

Cut spending

As you navigate your medical debt, it’s a good idea to avoid taking on more debt in other areas. Cut back on extra spending so you can focus on getting rid of medical bills before bankruptcy becomes your only option.

Reach out to family and close friends

When you’re in a financially vulnerable situation, it can feel hard to reach out to the people you care about for help. However, borrowing money from family and close friends may be a better way to address overwhelming medical bills than bankruptcy.

If you’ve tried everything else and have someone who is able and willing to offer temporary financial support, it can be a conversation worth exploring. Although facing a mountain of debt can be stressful, medical bankruptcy isn’t your only option, and you don’t have to go through it alone.

Investigate a personal loan

If your medical debt is still held by the provider — the physician’s practice or hospital — it usually has a low or 0% interest rate. However, if you paid your initial medical bill with a credit card, you may be facing high interest rate charges on the amount. If that’s the case, you could consider paying off the debt with a personal loan with a lower interest rate and more favorable payment terms. Additionally, you could research other strategies for paying off credit card debt before filing for bankruptcy.

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