Op-Ed: How to escape the medical care debt trap

The single biggest cause of personal bankruptcy in the United States isn’t job loss or irresponsible use of credit. It’s medical expenses.

An analysis this year by NerdWallet Health found that about 60% of all bankruptcies are health related. And a comprehensive study by Harvard researchers who examined a large sample of 2007 bankruptcy filings found that, “using a conservative definition, 62.1% of all bankruptcies … were medical.” That research, published in the American Journal of Medicine, found that most of these “medical debtors were well educated, owned homes and had middle-class occupations.”

And although access to health insurance can help stave off medical debt, it doesn’t solve the problem. About 10 million insured Americans have medical bills they are unable to pay. The Harvard researchers found that three-quarters of the medical debtors they studied had health insurance.

Unlike a car or home purchase, sudden illness and the often exorbitant cost of treatment can’t be planned for. But creditors don’t treat medical debt differently from any other debt. In 2010 alone, collection agencies targeted more than 30 million Americans for unpaid medical bills, according to the Commonwealth Fund.

That’s not right. There is a real difference between credit card debt and unexpected medical bills. More often than not, consumers who defaulted on credit cards also had other negative information weighing down their credit scores, whereas consumers with medical collections on their records often had excellent profiles before their medical crises.

Even a medical debt of as little as $100 is likely to be referred to collection, and that alone can lower a credit score by 80 or more points. The Federal Reserve estimates that about 1 in 6 credit reports in the U.S. contain a medical debt collection, and that nearly 17 million American adults have received a lower credit rating because of high medical bills.

Even when medical collections are paid or settled, they are not removed from your credit reports. They remain there for seven years from the date the original debt went into default. A new study released by the Consumer Financial Protection Bureau found that both paid and unpaid medical debt unfairly penalized a consumer’s credit rating.

The Medical Debt Responsibility Act, which was introduced in Congress last year, would help by requiring credit firms to remove settled or fully paid medical debt from credit reports within 45 days. But although the bill has a wide range of support from groups, including the American Medical Assn. and Consumers Union, it is stalled in committee. Advocates continue to push for passage, but there is good reason to be pessimistic about the bill’s chances. Similar legislation died in 2010, 2011 and 2012.

In the absence of congressional action, consumers should take action to protect themselves. It is important to keep track of balances and communicate regularly with health providers and insurers, particularly if a payment is going to be late or if you want to try to negotiate a payment schedule.

Consumers should also always ask for an itemized bill and report any potential errors or inconsistencies promptly. They should ask about financial assistance programs offered by the health provider and develop realistic payment plans. Whenever possible, consumers should avoid using credit cards to pay for healthcare, and they should be aware that many of the credit cards issued specifically for healthcare come with higher fees and interest. Finally, if a medical bill has been sent to collection, consumers should ask to attach a statement to their credit files explaining the debt.

A lot of attention is paid to helping people cope with the physical limitations and emotional turmoil that accompany a serious illness. But the long-term financial chaos and stress from medical troubles can be just as devastating. Congress should act on the Medical Debt Responsibility Act so that the economic toll of illness doesn’t continue to plague patients long after they have recovered. And in the meantime, consumers should do everything they can to protect themselves.

Steve Trumble is president and CEO of the national financial education nonprofit American Consumer Credit Counseling, which has offices throughout the country, including Los Angeles and San Francisco.

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