In 2016 the Kaiser Family Foundation made this report: “26 percent of U.S. adults ages 18-64 say they or someone in their household had problems paying or an inability to pay medical bills in the past 12 months.” Medical debt can be a burden. One way to address it is using debt consolidation.
In general debt consolidation can help borrowers manage the way they pay off their debt by getting lower interest rates, longer pay-off periods, reduced payments or sometimes all three. This process can be incredibly helpful when faced with a serious or extended medical issue resulting in big bills.
It’s good to plan in advance for medical bills. Ideally, you would have an emergency fund of at least three to six months of your essential expenses to cover costs in the short term while you recover from a medical issue and possibly not earn any income. You would also want to make sure you’re getting the lowest bills you can and check for possible tax opportunities that can save you money. As your medical debt increases, you should pursue options to consolidate it for the best financial situation.
Get the lowest medical bills
Do some homework to make sure you have the lowest debt to repay. Some of this must be done even before you visit the healthcare provider. Keep your health insurance in place without any breaks. Use in-network providers and stay on top of claims for proper processing.
Shop around for healthcare, especially for high-cost items such as hospital procedures. Negotiate with your healthcare provider for lower bills or extended payment plans. Look for payment support options, such as Medicaid, Children’s Health Insurance Program (CHIP) or possible state and local medical subsidies.
Consider tax effects
Related to the topic of consolidating medical bills are tax implications. You may have opportunities to reduce your tax bill with effective planning.
If you have high-deductible insurance, start building an HSA (Health Savings Account) now by putting money each year into a pretax account that you can use for health care expenses at any time. Unused amounts carry over into future years. If you have enough discretionary income, put the annual maximum individual or family amount into this fund. This amount will be subtracted from your gross income so you will pay no taxes on it.
In addition, if you expect to have very large one-time out-of-pocket medical expenses, you should plan treatment at the beginning or end of alternating years so that you have enough medical expenses in a given year to be well above the minimum for Schedule A medical itemization. Again, the excess will be subtracted from your gross income, possibly reducing your tax liability. Remember that for tax purposes, medical expenses occur at the time of treatment, not when you actually pay the bill.
Address your medical debt
As a starting point, be sure that you pay off any bills that are identified as “going to collection” before they are actually transferred from the health facility. You don’t want to have late and unpaid bills impacting your credit score and possibly reducing your access to credit or causing lenders to charge you greater interest. Pay down your credit card debt as well, as that is likely to be at a higher interest rate than most other debt.
If your medical debt reaches the point that you can’t keep up with ongoing bills, you have several options to deal with the situation.
- Use a personal loan. This option may have higher interest than secured loans and, but you can obtain funds quickly.
- Negotiate debt settlement of a lower amount with the healthcare provider. Some providers are willing to do this rather than take on a costly, longer-term collection process seeking the full amount. This action may show up as a negative event on your credit report.
- Work with a debt negotiator or credit counselor for help in negotiating with creditors. Carry out a “due diligence” review of the company you work with to be sure they provide worthwhile and reputable services.
- Consider using the equity you have built in your home. A home equity loan uses your home as collateral for a lump sum loan that you can use to pay off debt. Because the home equity loan is secured by your home, the interest is generally lower than unsecured loans. However, the application process is longer than unsecured loans.
- Declare bankruptcy. This option is not to be taken lightly as it has a serious impact on your credit score and financial reputation, but it may help you save your home from foreclosure. The bankruptcy process starts with credit counseling.
A recent data analysis from JP Morgan Chase indicated that liquid assets were the primary source of payment for medical bills.
When you’re in the middle of medical crisis, you want to focus most of your energy on recovery, knowing that you are following the best path for your financial health as well. Taking proactive steps to learn about medical billing and debt consolidation before you’re in a crisis situation are wise actions that will help you prepare for this potential situation before it happens to you.