Before you act, know that medical debt is different

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Since hospital bills are often unexpected and severe, medical debt is very common. About 1 in 5 Americans is being chased by debt collectors over unpaid medical bills, with a combined tally of $140 billion.

That sounds bad — and it is — but medical debt differs from other types in three important ways.

First, it is typically interest free or has a very low interest rate.

Second, if you stop paying and your debt goes to collections — often about three months past due — it won’t ruin your credit right away. The major credit-reporting bureaus provide a 180-day grace period before listing the delinquent debt on your credit reports, giving you more time to pay it off.

Finally, some credit scoring models treat medical debt less harshly than other kinds, so it might not do as much damage. And if you can convince your insurance provider to pay off the collection agency, the credit bureaus may remove the black mark from your credit reports early.

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So what’s the problem with refinancing?

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On the surface, consolidating medical debt works the same as consolidating credit card debt: You replace all of your troublesome balances with a new loan that works better for you.

That will leave you with just a single payment to manage. You won’t need to keep track of numerous bills with varying amounts and due dates.

This sounds pretty convenient — but unless you’re already paying interest on your medical bills, you’ll be adding costs by switching to a personal loan, line of credit or credit card.

Even if your credit score is in good shape and you can snag a zero-interest promotion on a credit card, you’ll only have a short time before the problem gets worse.

Not only that, you will lose all of the special protections attached to medical debt once you turn it into conventional debt.

Another potential reason to refinance would be to stretch out your debt over a longer span of time. This could reduce your monthly payments and help you avoid defaulting. But you might be able to achieve the same result if you just ask your creditor for help.

Other ways to handle your medical debt

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Instead of replacing your debt, see whether you can reduce your burden with one of the following options:

Talk to your providers about financial assistance

Try to negotiate a payment plan with your creditor, whether that’s a hospital, physician, laboratory or some combination. Ask whether you can split the bill into more manageable payments over a longer period of time.

The Affordable Care Act (ACA) actually requires certain nonprofit hospitals to provide financial assistance to low-income patients.

Although the ACA doesn’t specify the exact terms of that assistance, the nonprofit Patient Advocate Foundation says discounts range from 10% to a 100% write-off.

“Don’t assume that income or assets (such as home ownership) exclude you from qualifying for financial assistance,” it adds in a report. “Someone who earns $100,000 annually but has $25,000 in medical costs could qualify for assistance even if it doesn’t initially look like they would be eligible.”

You can also find out whether your state has its own medical debtor protection laws. About half of states spell out eligibility based on income and specify what type of assistance a hospital must offer, according to the National Consumer Law Center.

Look carefully at your medical bills

Just like credit reports often contain errors that damage your credit score, billing errors could be making your debt worse than it needs to be.

For example, you may have been charged higher rates than your insurance provider allowed or billed for disallowed charges under your coverage.

If you find any errors or unauthorized charges, contact your health care provider and insurance company for resolution.

Call in some support

If you’re feeling overwhelmed, enrolling in a debt management program may be a better way to consolidate your bills.

To do so, enlist a reputable credit counselor to help you manage your bills and create a payment agreement between you and your creditors. Two nonprofit companies that provide this service are American Consumer Credit Counseling and the National Foundation for Credit Counseling, though not all of their services are free.

A similar option is to hire a medical billing advocate. Some people do this if they are trying to manage a chronic medical situation or if they are having trouble getting their insurance company to pay for treatment.

These professionals promise to negotiate for you, help lower the charges on your bills and ensure you aren’t paying more than you should be. Some charge by the hour or take a percentage of the money you saved from their assistance.

Since this type of career is relatively new, you should look carefully to ensure you are hiring a reputable advocate. Two places you can go to find more are the Alliance of Professional Health Advocates and the National Association of Healthcare Advocacy.

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How to free up cash and avoid more debt

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Once your medical debt is in the most manageable shape possible, you’ll still need to find the cash in your budget to make your monthly payments. And sometimes, refinancing can help.

If you own your home, your first course of action should be to check how much you could save by refinancing your mortgage. Some 13.9 million mortgage holders could save an average $293 a month with a refi, according to mortgage technology and data provider Black Knight.

Keep in mind that the best interest rates go to borrowers with the highest credit scores. If your bills have been dragging your score down, use a free credit monitoring service to assess the damage and get advice on the fastest way to improve it.

Next, take a look at your insurance policies; studies show you could be overpaying by thousands per year. Start by using a quote-comparison site to check for a better rate on your homeowners insurance, then use the same strategy to save on your car insurance.

Finally, to avoid unbearable medical bills in the future, try not to go without health insurance for any period of time — and shop around to determine whether you have the best health insurance you can afford.

National open enrollment periods start in November for many insurance plans, and the federal government recently extended open enrollment for marketplace plans by an extra 30 days. Many states have extended their open enrollment dates, as well.

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About the Author

Noel Fletcher

Noel Fletcher

Former Reporter

Noel Fletcher was formerly the insurance and taxes reporter at MoneyWise. Prior to joining the MoneyWise team, Noel wrote for various U.S. and international business magazines, newspapers, syndicates and wire services, including Reuters. For fun, she writes books, takes photographs and enjoys adventure, travel, history and a good cup of coffee.

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