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How to get rid of medical debt (& prevent it in the first place)

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Medical debt is a serious financial problem. According to recent surveys and consumer data:

  • Almost a third of working Americans have some kind of medical debt.
  • About 28 percent of those who have an outstanding balance owe $10,000 or more.
  • About 54 percent of people with medical debt said in a recent survey they had defaulted on it.
  • Americans spend an average of about $5,000 a year on out-of-pocket health care costs, including insurance, prescriptions, and medical supplies.
  • Two-thirds of all bankruptcy filings are at least partially caused by medical issues.

Even if you have health insurance, it’s possible to accumulate significant medical debt. Many medical plans cover 80 percent of the cost for procedures and treatments. That leaves you accountable for the remaining 20 percent. Therefore, if you suffer an ailment that costs $100,000 to treat, your insurance company will pay $80,000, leaving you with a $20,000 balance.

Outstanding medical bills don’t have to ruin your finances. Here are a few tips on how to get rid of medical debt.

Talk to the provider

If you are planning to have a potentially expensive procedure, discuss the cost ahead of time. Get an estimate of what the final bill will be after insurance has covered its portion. You can then work with the provider to set up a payment plan and even make a “downpayment” ahead of the procedure if you’re able.

Plus, if you have an estimate of the cost ahead of time, you may be able to look for a provider that can do it for less. Just make sure that the provider is reputable and that your insurance company covers them.

If your medical debt stemmed from an unplanned procedure, contact the provider once you’ve received the bill. Whatever you do, don’t ignore it.

In either case, it doesn’t hurt to try to negotiate a lower cost. This is especially true if you can pay off the full balance sooner.

Also, if you can pay a large lump sum, you may be able to cut your overall bill substantially. For example, say your final bill after insurance is $10,000, but you have $5,000 in cash. Tell the provider you’ll give them the $5,000 to settle the bill in full. They may accept that offer. Like many businesses, health providers will gladly accept a lump sum in cash now rather than a larger sum spread out over several months.

Set up a payment plan

Most hospitals, physicians, and clinics will work with patients to set up a payment plan if their balance exceeds your payment ability. In most cases, there is little to no interest tacked on to the debt.

Determine a monthly payment you can afford to pay and get the provider to agree to that amount. Doing so will keep your debt out of collections, as the provider is better ensured that you’re working toward paying it off.

Many providers also offer a financial assistance policy. This provides patients of a certain income level with financial help for their bills. In some cases, your bill can be cut in half or completely forgiven. Ask the provider if they have such a plan and if you qualify.

Sell something of value

If having medical debt bothers you to the point you have to get rid of it, one option is to sell something you own and use the proceeds to pay off the debt.

Common examples include valuable collectibles, real estate, or investments like stocks and mutual funds.

Experts advise that you do not raid your tax-advantaged retirement account, like a 401(k) or IRA, to pay off medical debt. You may owe a tax penalty for withdrawing money prior to turning age 59 1/2. In addition, you will fall behind on your retirement goals.

If you sell stock or real estate you don’t live in, you may owe capital gains taxes. This occurs when you sell an asset for more than what you paid for it. The difference is called a capital gain, which you must report on the following year’s tax returns.

Don't pay off medical debt with other debt

Perhaps the worst action you can take is paying off medical debt using another type of debt. By doing this, you’re not helping your finances or your credit report, and you may even make things worse.

Paying off medical debt with a credit card means putting a low-interest or no-interest debt on a higher-interest credit card. The debt will cost you more over time than if you just set up a payment plan. The same goes for personal loans.

Also avoid a home equity loan to pay off medical debt, as you’ll be removing valuable equity from your home that can help you later.

Again, it’s better to set up a payment plan with the health care provider than to pay off medical debt with other types of financing.

3 ways to prevent medical debt

The best way to get rid of medical debt is to not accumulate it. Although that’s not always possible, here are three ways you can minimize the risk of drowning in medical debt.

Disability insurance

Disability insurance doesn’t directly pay for medical expenses, but it can help cover those costs in certain situations.

Chances are if you become disabled and can’t work, you will also require medical attention to treat that injury or illness. But if you can’t work, how will you pay your medical bills?

It may be easier if you have disability insurance. This type of policy covers the potential loss of income caused by injury or illness. If you are unable to work because of a covered disability, the policy will replace part of your income.

Critical illness insurance

Critical illness insurance (CII) is a type of supplemental insurance. It pays a lump sum benefit if you are diagnosed with a covered illness.

It is designed to help people cover the cost of treating and recovering from expensive illnesses and procedures, such as heart attacks, strokes, and cancer. Critical illness insurance can pay for costs not covered by health insurance, such as deductibles and out-of-pocket costs. You can also use the funds for travel expenses and your regular bills.

A CII policy may not wipe out all of your medical debt, but it can eliminate a large portion of it.

Emergency fund or HSA

Everybody is advised to have an accessible emergency fund. This is money set aside to help you through unexpected events that can hurt you financially. Having an emergency fund can improve your financial security and minimize the stress of health issues.

If a health event occurs, an emergency fund can protect you from having to use credit cards, take out loans, borrow from your retirement account, or rely on GoFundMe.

Another option specifically for health care expenses is to have a health savings account (HSA).

An HSA is a tax-preferred savings account that enables users to set aside tax-free dollars to pay for health expenses, including regular medical care, dental and vision expenses. It can only be used in conjunction with a high-deductible health insurance plan.

There is also an IRS limit to how much you can save each year in an HSA. In 2020, the maximum contribution amounts are $3,550 for individuals and $7,100 for families. You can contribute an additional $1,000 if you are 55 and older.

Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published August 26, 2020
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