Financial Poise
A silver stethoscope and ledger, representing medical debt and other overwhelming financial matters

Money Basics Series – Part 4: Medical Debt and Overwhelming Financial Matters

Personal Finance Fundamentals Every Adult Should Know

It’s one thing to manage debt caused by poor self-discipline. It’s another thing to deal with major expenses that are necessary, but overwhelming. Medical debt is an example we’ll use here, but it’s just one example that demonstrates the point of this article: your debt does not reflect your morality.

My daughter has treatment-resistant epilepsy. She has been suffering with seizures for more than a decade. The emotional costs have been tremendous. It is so painful to watch your child (or anyone) seize up, convulse and check out. But this article is about the financial costs. My daughter is covered by insurance, for which I am grateful, but that hardly covers the actual costs of her health-impaired life.

Medical Debt Often Comes Without a Choice

As a hardworking member of the middle class, I have been saddled with tremendous medical debt to care for my daughter. You know the story. I’ve earned too much money for her to obtain government aid, yet not enough to afford her care. This leaves me with the sickening choice of not providing the very best care “money can buy,” or using credit and personal loans to pay for services and treatments that are otherwise out of my reach.

Insurance does not cover co-pays for the handful of pills my daughter takes three times per day, nor does it cover the co-pays for all the doctors she must see regularly. Insurance does not cover the 24/7 care she requires or the personal items that get destroyed in the wake of her seizures – crushed eye glasses, for example, are a frequent and unavoidable occurrence. And, there is no choice about whether to replace those.

This past week my daughter’s doctor ordered an in-hospital 48-hour video EEG. Can you even guess what 48 to 72 hours at a New York City hospital costs? Beside the astronomical hospital bill (and you should always ask for an itemized bill), there are the exorbitant, non-medical costs just for staying at the hospital.

For example, “hospital food” is provided, but the cuisine is bland and lukewarm if you are lucky. You will likely be running out to purchase three meals per day for the patient and visiting family members. While I always advise people to shop for groceries and eat healthy, when your family member is admitted to the hospital, it is nearly impossible to do so.

If your child is admitted to a large hospital in a major city, you can add the cost of a hotel stay. Or, if you are fortunate, you may be blessed to sleep in a bedside recliner. On this particular visit, I was offered a recliner chair that didn’t actually lock in position. Every time I moved, the chair closed up on me like a rubber band.

Then there are other add-on expenses, including the cost to park your car (in NYC overnight parking runs approximately $60/day), a stop at the crafts store for in-room entertainment and online games and movies.

As I try to calculate all of these expenses, I am left with the sinking feeling that the costs of this medical adventure will now be known as our “lost” summer vacation. Where on the spectrum do these unexpected medical expenses fall? Am I going to clean out my emergency funds? Yes. Am I going to take the money I had scraped aside to go to the beach this summer? Yup.

Am I the only one? Nope.

It is well known that medical debt is the number one cause of personal bankruptcy in America. Unfortunately, because there are so many unknown and uncovered costs (e.g., out-of-network doctors, hidden and unexpected fees, billing mistakes and widely differing fees for services and procedures), there is often no choice other than to go deep into medical debt to buy good health.

A recent poll by the LA Times and Kaiser Family Foundation found that about 40% of individuals with employer health coverage had difficulty paying their medical bills or insurance costs. In addition, 9% of respondents reported declaring personal bankruptcy as a result of their medical bills.

Protecting Your Assets in Overwhelming Financial Situations

I am constantly harping on the benefits of paying yourself first and having an emergency fund.

There is another key component to your financial health known as asset protection. That means having funds that are yours alone, exempt from third-party “unsecured creditors” that include the trillion dollar, money making medical industry. In other words, you should have some of your money “tied up” in retirement and/or trust accounts (which differ state to state) to provide a safety zone for the assets you have earned, even if you do become indebted for medical costs.

These days medical treatments can easily be deemed extravagances. While you may consider yourself a moral person, and while you may not spend indulgently on frivolous items, can you deny your child medical attention? At the end of a hospital stay, if you don’t have money to pay those bills, you may have no choice but to default on payment and either file for personal bankruptcy or settle with your creditors.

By putting money into your exempt retirement account every pay period, you can generate and accumulate “protected” money. This is money your creditors cannot access. Our government has intentionally set up these mechanisms to allow people the ability to save for their futures in vehicles that cannot be pierced and taken by creditors.

Wants vs Needs: Accepting Debt as a Necessity

Every day we have to make choices between needs and wants. Sometimes we are overwhelmed and feel that certain wants are actually needs. Other times, what we see as needs are actually real needs. They cannot be defined as splurges, yet the costs go far beyond the actual dollars that we have available. We have to make educated, fact-based decisions regarding how to proceed and how to protect our families.

I am not leaving my daughter’s bedside, because the parking expense is too high. I will have to break my budget and use both my emergency and vacation funds. I will spend more than I normally would on an average week in May, but as I see it, I have no choice.

The good news is that I will not dip into my exempt retirement account, which would cost me not only the principal, the penalties and interest, but also the continued compounding interest I am earning as the money stays safe. And no one can make me. If I can pay the medical bills as they arrive, I will. If I can’t, I will try to negotiate. Not paying may cost me a large hit on my credit score, but I am prepared to take the blow. It will take five to seven years to repair my credit. That “hit” to my credit may cost me a higher interest rate when I try to get a new car or loan, and it may cost me a job if I look for a new one. It may also impede my ability to get housing if I choose to move. But what choice do I have?

My daughter’s health is more precious than my money. So, this is today’s bottom line: Save your money, and pay yourself first on a regular basis. Be sure to keep a portion of your money in an exempt vehicle, whether it is a Roth or Traditional IRA, a 401k plan, a trust or a life insurance policy. Don’t be afraid to use credit or to negotiate debt, if you need to.

Tim’s Story

I’d like to emphasize this advice with a story about my friend Tim.

Tim is 62-years old. He has always worked hard and lived within his means. His only asset is his house, which after 30 years is paid in full. While at one point Tim had some stocks and some significant savings in his 401k plan, Tim depleted those accounts to pay for immediate needs over the years. Those needs included college for his kids, large home improvements, and most recently, funding his two daughters’ weddings.

While Tim was slightly uncomfortable using the funds he had accumulated, he was a good, hard worker. He felt confident that he would reacquire his wealth once the larger expenses of raising his family were behind him. “I’ll start saving as soon as the kids finish school,” changed to, “I’ll start saving as soon we get the house in shape,” which changed to, “I’ll start saving as soon the girls are married.” Tim never got back to saving.

Unexpectedly (and who expects these things), Tim suffered a minor heart attack last year. He was covered by insurance, but apparently, he was billed for a host of expenses, including “out of network” services.

After returning home, while building up his strength, Tim was invoiced $73,000. The black cloud of medical debt over Tim’s head impacted his every waking moment. Not knowing what else to do, he went to his local bank and was assured that the best course of action to take was a reverse mortgage on his home.

Tim Used a Reverse Mortgage to Pay Medical Debt

The reverse mortgage, also known as a home equity conversion mortgage (HECM), allowed Tim to borrow money against the value of his home. While no repayment is required until Tim dies or sells his home, this special type of home loan (for homeowners 62 years or older) will cost Tim the borrowed amount, plus accruing interest. This loan has effectively deprived Tim of the equity (the value of the house over the current market value) in his home, which took him a lifetime to grow.

The medical bill was accurate, and Tim did owe the money, but he simply did not have liquid assets to make payment in full (or even close). His first action should have been to investigate his options. Medical bills are often negotiable, but as the consumer, you have to inquire about your options and do so before they are sent to collections. Hospitals, and many medical providers, have financial assistance programs, but you must ask for help to obtain access.

Those who fail to ask can lose by default, and then it is too late. Before you make the call to negotiate your outstanding bill, be prepared. You should have on hand specific details to address (1) your current financial hardships and (2) your concerns regarding the pricing of services you received.

Compare the “reasonableness” of charges on your bill by accessing a service such as Healthcare Bluebook, which provides a database to nationwide pricing for standard medical procedures. Using this “1-2″ approach, you will likely be able to make a mutually acceptable arrangement to reduce and/or pay down your medical debt in a manner consistent with your income and financial capability.

Taking a secured asset (such as your house) or an exempt asset (such as the money in your retirement account) to pay for medical debt, which is not secured by any asset, is not necessary. In fact, it is contrary to your best interests. If medical debt were meant to be secured, you would have to sign over the title to your house or retirement fund before the doctors began to work on you. While this scenario might one day be the case, it is not now, so please don’t make it any easier for the creditors.

Negotiating Your Debt Is a Business Decision, Not a Moral One

Is it immoral to negotiate your medical bill, even though you received and benefited from the services? No. It is simply a business decision. You didn’t get to set or negotiate the prices charged for the medical procedures. Once you are back on your feet you are your own best, and only, advocate. Only you are responsible for your future. Creditors have one, singular goal: to have the debt paid. If, however, they recognize that by not negotiating they may not get paid at all, their attitude often changes to accepting a lesser or longer term payment, rather than risking a complete loss (in the event you file for a Chapter 7 bankruptcy).

In Tim’s case, he took the only asset he had left (his home) and used it blindly to pay off his medical debt with the advice of a “professional” mortgage broker. But who will pay Tim’s next debt or emergency? Had Tim negotiated his medical debt, he would still have the equity in his house for the next rainy day emergency. Now in less than stellar health, Tim is good with his conscience, but his wealth has almost fully evaporated.

A Sober Look at Debt Repayment

While I do believe we are responsible for our debts, there are reasons that laws exist to allow a person to file for bankruptcy and yet still keep exempt assets (including some equity in their homes and their entire retirement funds). If you are more concerned with and aware of your own personal finances and your long-term financial obligations owed to yourself (rather than third-party creditors), you will better appreciate the remarkable value of negotiating debt.

If you can’t pay your bills because of medical debt or other circumstances out of your control, it does not make you immoral. Money transactions are business – not moral – decisions. If you do not have enough money to take care of yourself, now and in the future, you cannot be giving the little bit you do now have away to pay old debts. You need to take your new, incoming income and apply it to your future, not your past.

If your friends, the Joneses, object, insult or negatively opine about your choices from high upon their perches, find new friends – but keep your money!

Read More ‘Money Basics’

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Alpha, Beta & Other Key Concepts and Goal Based Investing – Planning for Key Life Events.]

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About Michelle Gershfeld

I’m a debt settlement and bankruptcy attorney who negotiates resolutions between clients and their creditors. I am also a real estate attorney involved in both sides of purchasing and selling distressed real property. I am passionate about teaching people about money and helping individuals of all ages achieve financial independence and success in a "no…

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