It’s one thing to manage debt caused by poor self-discipline. But accruing debt is out of our control.
The most common example of this is medical debt. More than 100 million people in the US currently hold medical debts, with the most marginalized communities disproportionately impacted. In a recent survey, 27% of respondents indicated they had put off seeking medical care because of costs – which leads to higher bills down the road.
The reality is that medical debt is often necessary – not a reflection of your ethics or financial savvy. And medical debt is not the only kind of debt that falls into this category.
But with the right financial planning and knowledge, you will be better prepared to navigate what are often emotionally and financially turbulent waters.
To help illustrate how debt goes from a choice to a required burden, let’s use a personal example.
My daughter has treatment-resistant epilepsy. She has suffered seizures for more than a decade. The emotional costs have been tremendous. It is incredibly painful to watch your child (or anyone) seize up, convulse, and check out.
But this article is about the financial costs. Fortunately, my daughter is covered by insurance. Even so, that hardly covers the actual costs of her health-impaired life.
As a result, this hardworking member of the middle class has accrued tremendous medical debt. You know the story. I’ve earned too much money for her to obtain government aid but 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 I cannot otherwise access.
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 eyeglasses, for example, are a frequent and unavoidable expense.
My daughter’s doctor at one point ordered an in-hospital 48-hour video EEG. Can you even guess what 48 to 72 hours at a New York City hospital costs? Besides the astronomical hospital bill (and you should always ask for an itemized bill), exorbitant, non-medical costs associated with staying at the hospital stack up fast.
If your child is admitted to a large hospital in a major city, you can add the cost of a hotel stay. The cost of overnight parking in New York City can top $60 a day. Expenditures on entertainment during the hospital stay may catch you by surprise.
As I try to calculate all of these expenses, the sinking feeling that the costs of this medical adventure will now be known as our “lost” summer vacation takes hold. Where on the spectrum do these unexpected medical expenses fall? Will I clean out my emergency funds? Yes. Will the money I had scraped together for a beach vacation get wiped out? Yup.
Am I the only one? Nope. But this example shows how all the financial responsibility in the world cannot prevent debt accumulation under overwhelming circumstances.
Every day we make choices between needs and wants. Sometimes that means pushing back against the impulse to categorize desires as requirements.
But sometimes a need is just a need. They cannot be defined as splurges. And sometimes, they require far more money than we have at our disposal. This means we have to make informed, thoughtful decisions regarding priorities.
I am not leaving my daughter’s bedside, because the parking expense is too high. This will involve breaking my budget and using both my emergency and vacation funds. I will spend more than I normally would in an average week.
But my daughter’s health and well-being is more precious than money. This serves as an example of how numbers are not the only factor in determining the difference between a need and want. The qualitative element of emotion holds relevance, too. Including it in your decision-making process does not make you a bad person. It makes you human.
Necessary debt can throw anyone for a loop. Medical debt, specifically, causes 66.5% of bankruptcies in the US. Fortunately, there are a few steps you can take to better protect yourself from such proceedings.
Every service provider screws up the bill now and again. Sometimes the subsequent pricetag causes such pronounced sticker shock that you miss how the line items add up.
Should you find yourself facing such a bill, take a deep breath. That number may be off. Medical debt resolution firm GoodBill found that 60% of medical bills include errors.
Look over each piece of it to evaluate whether it includes incorrect charges. Report any such mistakes to your creditor. This may reduce your financial burden substantially.
If your creditor balks at an adjustment, you still have options. For example, the 2022 “No Surprise Act” requires medical providers to give you a good faith estimate of costs prior to treatement. If the final bill differs from that estimate by more than $400, you may have recourse through patient-provider dispute resolution. With other necessary debts, the Fair Debt Collection Practices Act offers you protection from exploitation by collection agencies who use deception – including refusal to adjust your obligation for errors.
Whether talking to a hospital or collections agency, the person on the other end of the line has one goal: to get your money.
If your necessary debt adds up to more than you can immediately pay, you may have some wiggle room. As Jared Walker, the founder of medical debt non-profit Dollar For, explains:
People see that bill and the number on that and they think, ‘I have to pay this quickly and I have to pay this exact amount,’ and that’s just not the case. You have time. They’re fake numbers.
The “fake” numbers are essentially an attempt by the medical provider to collect as much money as they can for services rendered.
With one in five Americans reporting they do not ever plan to pay off their medical debt, the provider and collections agencies realize that some money is better than none. As a result, you can view that bill as a starting point for negotiations. Good For found that this tactic can lower your total bill by as much as 50% if you can pay the remainder immediately.
Those who fail to ask can lose by default, and then it is too late. Though everyone can benefit from negotiating, this step often proves critical for those in dire financial straits.
Before you make the call to negotiate your outstanding bill, be prepared. You should have on hand specific details to address your current financial hardships and 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. This tool provides a database of 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.
If you can’t afford the minimum settlement offered, you still have options. Most debt collectors will work with you to create a payment plan – again, guaranteeing them some level of repayment instead of none.
I am constantly harping on the benefits of paying yourself first and having an emergency fund, but that won’t always cover everything. In these cases, asset protection becomes a critical component of ensuring your financial health.
That means having funds that are yours alone, exempt from third-party “unsecured creditors” like the trillion-dollar, money-making, notoriously aggressive medical industry. In other words, you should have some of your money “tied up” in vehicles beyond their reach.
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.
So save your money, and pay yourself first on a regular basis. But 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. You’ll thank yourself later.
Meet my friend Tim. At 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, he depleted those accounts to pay for immediate needs over the years. Those needs included college for his kids, large home improvements, and 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.
But, “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.
Then Tim suffered a minor heart attack. He was covered by insurance but was billed for a host of unexpected expenses, including “out-of-network” services. The jaw-dropping total? $73,000.
This undeniably necessary debt weighed heavily on Tim’s 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.
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 will cost Tim the borrowed amount PLUS accruing interest. This loan has effectively deprived Tim of the equity in his home, which took him a lifetime to grow.
This amounts to 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. This kind of necessary debt is not secured by any asset. 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.
Panicking over paying your medical debt immediately can lead to some foolhardy choices. That urgency is a remnant of years gone by – when medical debt could cripple your credit score. Recent changes at the major credit bureaus are expected to ultimately wipe 70% of medical debts from consumer credit reports.
In other words, Tim unnecessarily put his home and protected assets at risk due to perceived urgency. It didn’t have to play out like this.
If Tim were to face the same situation today, different choices would put him in a much better position. How so?
Tim didn’t need that reverse mortgage. Neither do you. Necessary debt resolution rarely requires extraordinary measures. It just takes a little leg work, persistence, and patience.
While I do believe we are responsible for our debts, the mechanisms that protect us from suffering due to necessary debt exist for a reason. Don’t view taking advantage of these tools as a moral choice. It’s business.
That doesn’t mean necessary debt can’t become overwhelming. But with the right preparation, knowledge, and efforts, shouldering that debt gets a little easier.
Don’t miss the next Money Basics Series installment:
Finances in a Relationship
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Michelle Gershfeld is a bankruptcy attorney, debt negotiator, and personal financial life coach who advises people in debt or building wealth, by identifying and overcoming obstacles that lie in their path to securing worry-free, financial wellness. Michelle’s private practice, Law Offices of Michelle Gershfeld, provides services to clients on financial distress, workshops with clients individually…
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