Bucks Blog: Medical Debt Cited More Often in Bankruptcies

Andrew Harrer/Bloomberg

Medical debt is increasingly a factor in personal bankruptcy filings, an analysis of data at a large credit-counseling agency finds.

Roughly 20 percent of those seeking financial counseling this year and last cited medical debt as the primary cause of their decision to seek bankruptcy protection, according to CredAbility, an Atlanta-based nonprofit credit counseling agency that serves clients nationally. That’s up from about 12 to 13 percent in the prior two years. The analysis included more than 47,000 clients for the first half of this year, and more than 100,000 in each of the prior years. (Federal law requires anyone filing for bankruptcy to receive counseling in case other options are available.)

With unemployment persistently high, more people have lost health coverage along with their jobs, says Michelle Jones, the agency’s senior vice president of counseling. Health costs are escalating for employed people, as well, in the form of higher premiums and deductibles. More health plans are offering lower monthly premiums in exchange for higher deductibles, but that means people find themselves on the hook for more out-of-pocket costs, if they get sick.

One reason people tend to get into trouble with medical debt is that they are reluctant to default on health care payments, Ms. Jones said. So, rather than not pay their doctor, they take out a new credit card — often with high interest rates, if their credit is less than stellar– and run up debt on their credit cards to cover health care costs. The short-term problem is alleviated, but the interest begins to compound and in short order they’re in trouble.

“With medical bills, people are very compelled to make good on those debts,” she said. “If you’re sick, it’s the person taking care of you. So they feel bad about not making the payment. People take extraordinary steps to pay them.”

People who have lost their jobs, but are continuing their group coverage under the federal law known as COBRA, may find it difficult to make the higher premium payments and end up putting them on their credit cards if they can. Another scenario, she noted, is that if patients need continuing therapy, they may have to put payments on their credit cards, or they can’t continue treatment: “If they don’t pay, services won’t be provided.”

Medical debts can be particularly stressful because they tend to be referred to collection agencies quickly, since it’s expensive for clinics and hospitals to chase payments that aren’t covered by insurance.

There may be alternatives to a bankruptcy filing, she said, for those who have run up credit-card debt paying off their medical bills. They may, for instance, qualify for a debt management plan, which is a plan negotiated with creditors to allow the cardholder to pay down the debt over time, she said.

Have you incurred higher credit card debt because of medical bills?

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