What Happens When Medical Bills Go to Collection?
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Nearly everyone faces an unexpected medical bill from time to time. Some are lucky enough to have a comprehensive health insurance policy that covers all or most of their bills. Others have the financial wherewithal to handle the cost.
However, manyย arenโt so well protected. According to the White House, one in three Americans have medical debt. Of that debt, according to the Consumer Financial Protection Bureau, $88 billion is in collection. If you canโt pay your medical bills, the medical provider can sell your debt to a collection agency to recover the unpaid amount. This can affect your credit score negatively, which can damage your ability to secure loans.
The good news is that medical debt is now treated less harshly than other types of consumer debt.ย
According to the Consumer Financial Protection Bureau (CFPB), it used to be that most healthcare providers started selling outstanding debt to collection agencies after 60 to 120 days or more past due. However, recent legislation (see โWhat is the 2021 Medical Debt Forgiveness Act?โ below) has changed that period to one year past due.
Even better, the CFPB said that the three largest credit bureausโTransUnion, Equifax, and Experianโannounced that all paid medical debts and unpaid debts less than a year old would be removed from credit reports. In April 2023, they extended this to all medical collections under $500.
This extra time gives you more to work with your insurance company and medical provider to try to create a payment plan that keeps that debt from reaching a collection agency.
The first step is to make sure that you actually owe everything that is on your bill. Scrutinize each item to see if it is correct. The Centers for Medicare and Medicaid Services has a useful checklist to help you with this task. And double-check with your insurance company to make sure it has paid for everything it is supposed to cover.ย
Reach out to your medical provider to see if itโs possible to create a payment plan that works for you. Some may offer a medical credit card option. Both of these have risks and can affect your credit. But they could keep your medical debt out of a collection agency. In fact, if you do set up a plan, always put that agreement in writing. Make sure that the plan explicitly states that as long as you are meeting its terms, the provider will not send the unpaid balance to a collection agency.
Another place to look for funds is to take a hardship loan from your 401(k). This is generally not advisable because it endangers your future. But in an emergency, you will not be penalized for withdrawing funds and will be able to pay them back later, with interest that goes to you, not a bank.
Other ways to pay off medical debt are to take out a loan or acquire a 0% interest rate credit card.ย
If nothing works and your medical bills arrive at a collection agency, itโs time to act. Contact the agency right away and see what you can do to get the bill paid. Needless to say, paying off the bill fastโthe best optionโis not always possible. There are two widely used alternatives to consider.
One helpful next step is to work with a nonprofit credit counseling agency to set up a debt management plan to pay off the debt. This generally involves setting up a three-to-fiveโyear program in which you pay the counseling agency and it pays the collection agency. This will likely do less damage to your credit than the next alternative.ย
This strategy involves negotiating whatโs called a โsettlementโ with the collection agency, which means that you agree to pay a portion of the debt. Settling is preferable to continuing to be late on payment and going into default. However, the problem with accepting a settlement is that, because you have not paid the full amount owed, the unpaid portion may remain on your credit report as a negative mark for seven years.
You can always remake your credit profile, even if delinquent bills have gone to a collection agency. There are three steps to take:
The last is especially important, because those balances affect your credit utilization ratio, which helps to determine your FICO score. It is calculated as a percentage. Add up your total debt, divide it by your total credit limit, and multiply by 100. Experts recommend that you donโt let your credit utilization ratio exceed 30%.
Youโre moving along paying off a medical bill, and, surprise, your unpaid balance ends up in collections. What gives?
As noted above, even if youโre paying off your bill, the provider can still send the unpaid balance to a collection agency. Thatโs why itโs essential to work out a payment plan with the provider and always get that agreement in writing. If no payment plan seems feasible, then itโs time to try negotiating a debt management plan or settlement agreement with the agency.ย
Your health insurance may pay for the bulk of your visits to your primary care doctor, referrals to see someย specialists, treatment at a hospital, and other costs. However, there are many costs that health insurance doesnโt cover, and there are deductibles, copays, and premiums you must always factor into your medical expenses.ย
Be sure to study your health insurance policy to understand the parameters of your coverage. Call its help line to clarify pointsโideally before a medical emergency occurs.
The 2021 Medical Debt Forgiveness Act is designed to help Americans who are dealing with medical debt by forgiving the debt and helping them get back on their feet financially. It states that a consumer protection agency is forbidden from adding medical debt information to a consumer credit report if the debt was fully paid or settled or is less than a year old. In addition, a debt collector must notify the individual before reporting medical debt to a consumer reporting agency.
As noted above, many protections have been enacted to prevent medical debt from ending up on your credit report. This gives you more time to find a way to pay off, or settle, the debt.ย
However, any debt that isnโt protected will show up on your report and negatively affect your credit score. Once that happens, all you can do is work to pay off or settle the debt as quickly as you can.
If your unpaid medical bills go to a collection agency, itโs not the end of the world. You can work with the agency to find the best way to pay off the debt, whether through monthly payments or a settlement that dismisses a portion of the debt, and make sure that it is eventually erased from your credit report.
Yes, it does. However, you are still responsible for the unpaid amount, and the credit score impacted by the debt could affect your status when you apply for a loan, an apartment, or a job.
Contact the collection agency and the medical provider to ensure that inaccurate information about unpaid medical bills is taken off your credit report.
They certainly can. A low credit score caused by bills in collection can lead to a higher interest rate on a mortgage or even prevent you from buying a house.
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