Borrowing to Pay Medical Debts

Borrowing to pay medical debts creates new potential risks. A debt that was easy to discharge in bankruptcy becomes one you often can’t.

About one-fourth (26%) of American adults (18-64 years old) reported that they or someone in their household had problems paying medical bills during the previous year. This is according to a 2016 survey by the highly reputable Kaiser Family Foundation, The Burden of Medical Debt. Not surprisingly, more than half of people who did not have health insurance reported such problems. However, more than one-fifth of people who had health insurance still had trouble paying medical bills. So if your medical bills are a challenge for you, you’re not alone.

You may have options short of borrowing money to pay off the medical debts. It’s worth contacting the medical creditor—as early as possible—to find out about their payment alternatives. Sometimes interest-free repayment plans are available. In some situations, medical providers are willing to negotiate a settlement with you reducing the balance. Especially if you are uninsured, you might even qualify for financial assistance.

Borrowing Options

Once you’ve exhausted these options, you might be tempted to borrow money to pay off your medical debts. This may seem sensible if the bills have been sent to collection, you’ve been sued, or both. Once they get a judgment against you, you can expect garnishment of your paycheck, levy of your bank account, or both soon after. And if you own a home or other real estate, a judgment lien would likely attach to it if you are sued in District Court.

However, borrowing to pay off your medical debts has its own risks. Let’s look at some borrowing options and their downsides. These options include:

1. Credit cards
2. Other unsecured personal loans
3. Secured loans

Credit Cards

As you may know, virtually all medical providers are happy to accept payment by credit card. So if you haven’t already maxed out your cards, it’s a convenient way of financing your medical bills. Because of the convenience, it’s a very tempting way to borrow to pay medical debts.

But it’s likely a very expensive source of credit. Interest rates tend to be substantially higher than other potential sources. Late fees and other charges can be significant. These various costs can make an already very challenging situation worse. Conceivably putting all your medical debts on credit cards could push you into bankruptcy when you could have avoided it otherwise.

There’s an additional danger if your financial situation is already very precarious before you put the medical debt on a credit card. Under certain circumstances, credit card creditors could challenge your right to “discharge” (permanently write off) the debt in bankruptcy. Their argument would be that you incurred the credit card debt without the ability or intent to pay it off. See U.S. Bankruptcy Code Section 523(a)(2)(A). As a result, you risk changing a medical debt that bankruptcy almost certainly can discharge into a credit card debt that would be more difficult.

So if you’re considering bankruptcy, see a bankruptcy lawyer as soon as possible. Preferably see one before paying for medical debts with your credit cards. If you’ve already used your credit card(s) for this purpose, please see a lawyer before doing this any more.

Unsecured Consolidated Personal Loans

You may have various options for borrowing to pay for medical debts without providing any collateral.

You might qualify to get a loan to pay for specific procedures beforehand. For example, here’s a rather detailed review of one of these specialty lenders by Credit Karma.

There are medical credit cards, and revolving credit accounts for ongoing medical expenses. For example, here’s Credit Karma’s recent review of one of these healthcare credit cards.

More conventional personal loans can be used for medical debts and other purposes. Some lenders—such as SoFi—are able to lend relatively large amounts. Others, like United Medical Credit (a medical loan network referring you to the actual lenders), focus on loans with a co-signer.

All of these come with the same risk of potentially not being discharged in bankruptcy discussed above.

In addition, using a co-signer may have virtually the same effect. If you end up filing bankruptcy, you would likely be able to discharge your own liability on the debt. But your co-signer’s liability would continue. So you may feel morally obligated to repay your co-signer whatever he or she ends up paying on your debt.

Secured Loans

The advantage of giving collateral to a lender is that this additional security usually results in a lower interest rate. And particularly when in the form of a home equity loan, payments are often extended over a long period. This results in a low monthly payment.

The disadvantage is that the creditor gets the right to your collateral if you don’t pay the loan on time. If you want to keep the collateral, you have to pay the debt. Even if you surrender the collateral, the creditor generally can chase you for any remaining balance after selling the collateral.

This is only a bit different in bankruptcy. You can choose whether to keep or surrender the collateral. If you keep it, you’ll have to pay the debt, or at least up to the value of the collateral. If you surrender the collateral, you’ll either discharge any remaining balance or pay only some of it.

Bottom Line

Medical debts are almost always unsecured and easily discharged in bankruptcy. Borrowing to pay off medical debts potentially causes additional problems, as outlined above. If bankruptcy is at all conceivably on your horizon, try to avoid paying medical debts by borrowing. Or, before you borrow, use the situation as an incentive to see a bankruptcy lawyer to get some legal guidance.