Medical debt is very common. In 2022, it was estimated that around 23 million Americans had unpaid medical bills, with the amounts they owed ranging from $250 to more than $10,000. 1
If you have hospital bills that have been charged off and sent to a debt collection agency, you’re far from alone. The good news is that, if you’re having trouble paying off your debts, it might be possible to settle them for less money than you owe.
We’ll talk about why paying off medical collections is necessary, the pros and cons of using debt settlement to do so, and what your other options are.
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Should I pay off my medical collections?
Yes, in most cases, you should pay off medical bills in collection. Paying them off has several benefits, including:
- Protecting you from lawsuits: Unless your medical debt is very old (i.e., it’s time-barred debt), you can be sued over it. If the court rules against you, your debt collector can garnish your wages, taking money from you against your will. Paying off your debt eliminates this risk.
- Stopping debt collectors from harassing you: If you have a medical bill in collections, you’ll probably repeatedly get calls from debt collectors. Paying it off is a sure-fire way to stop them from persistently contacting you.
- Improving your credit score: Medical debts affect your credit score once they’re transferred to debt collectors. Paying them can significantly improve your score, although this isn’t guaranteed. We’ll explain this in more detail below.
- Avoiding additional fees: Medical bills can be subject to interest and late fees if you don’t pay, negotiate, or resolve the balance quickly. 2 Paying off your debts as quickly as possible often means paying less overall.
The upshot is that paying off medical debts in collection has significant benefits for your financial security and overall peace of mind. Of course, it’s often easier said than done, which brings us to debt settlement.
Settling medical debt in collections: how it works
Settling a debt means paying it off for less money than you actually owe. You can do this by negotiating with the debt collector that was hired to collect your debt (or that owns it, if your hospital or clinic sold the debt to them outright).
Settling medical debt has both advantages and disadvantages.
Pros and cons of medical debt settlement
The second con is particularly crucial. Like collection accounts, settled debts are counted as “negative marks” on your credit report, which means they damage your credit score. This in turn means that settling a medical debt isn’t as good for your credit as paying it off in full.
However, if paying in full isn’t a realistic option, settling your medical debt is still much better for your finances (and potentially your credit) than not paying it at all.
How to settle medical collection accounts
If you’ve decided to settle your medical debts in collections, you have two options:
1. Settle the debt yourself
To do this, find out which debt collection agency you owe money to and then contact them. Tell the collector that you can’t afford to pay in full, but you want to arrange a debt settlement. Name the amount you’re able and willing to pay.
You can create your letter by using the free template provided below.
2. Hire a debt settlement company
If contacting your debt collector on your own sounds difficult or intimidating, you can hire a third-party debt settlement company to negotiate on your behalf.
Pursuing this option has its own pros and cons. Hiring a debt settlement company can save you time and hassle, but these companies don’t do anything you can’t do yourself, and they obviously cost money (often 20–25% of either your total debt or the settled debt).
Medical debt settlement scams are also quite common, so be careful. Thoroughly vet whichever company you choose and never agree to work with a company that asks for money upfront (which is illegal). 3
How much should you settle medical debt for?
On average, consumers who pursue debt settlement end up paying less than half of what they originally owed. 4 That means that 50% of your total debt is a reasonable place to open your negotiations.
It’s possible your debt collector will send you a counteroffer, which you can either accept or respond to with further offers of your own. The maximum amount you should settle for obviously depends on your finances and how much you can afford.
How settling a medical debt affects your credit
As mentioned, both settled debts and medical collection accounts hurt your credit score. However, settled debts are less damaging than collections.
Newer credit scoring models stop penalizing all collection accounts once you pay them off. In these models, settling a medical debt will lead to a partial (but not full) recovery in your credit score. That’s because debt settlement essentially means replacing a very damaging mark (a collection) with a moderately damaging mark (a settled debt).
Unfortunately, older credit scoring models are less forgiving, and treat paid and unpaid collections the same (meaning both damage your credit score equally).
In these models, settling your medical debt won’t help your score, and might even hurt it. That’s because you’re incurring a new negative mark in addition to the old collection account, which will continue to damage your credit even after you’ve paid it.
Credit scoring models that reward settling medical debt
Settling a medical debt in collections will improve your credit score in all of the following models:
Credit scoring models that don’t reward settling medical debt
Settling medical collections will not benefit your credit score in the following models:
- FICO Score 8 (the most widely used credit scoring model)
- Other prior FICO models
- VantageScore 1.0
- VantageScore 2.0
Should you settle medical collections even if it won’t benefit your credit score?
Given that in FICO 8, the most popular model, settling medical collections will (at best) have no effect on your credit score and might even harm it, it’s understandable if you’re wondering whether you should pursue this option at all.
In short, the answer is yes, medical debt settlement is often still worth it. It’s true that it has a mixed effect on your credit score, but its other benefits—freeing you from the threat of lawsuits and stopping your debt from accumulating interest—are still significant.
The good news is that both settled debts and collection accounts always fall off your credit report after 7 years and their negative effects on your credit score diminish over time. In other words, any damage to your credit will be temporary.
How settled medical collections will affect your credit score in the future
Medical collections will undergo several changes in the near future that will make them less harmful to your credit score (and that will make debt settlement more attractive).
The three main credit bureaus, Equifax, Experian, and TransUnion, have announced that as of July 1st, 2022, paid medical debt will no longer appear on consumer credit reports. The 6-month grace period before medical collections show up on credit reports will also be increased to one year.
Moreover, as of January 1st, 2023, unpaid medical debts that are worth less than $500 will no longer appear on credit reports. 5
These changes are part of an effort to penalize consumers less for medical-related debts. Once they’re implemented, settling debts will be universally beneficial to your credit score, even if your lender uses an earlier credit scoring model.
Alternatives to settling medical debts in collections
Settling your medical bills is sometimes the right choice, but it’s not your only option. Before committing, see if any of the alternatives below make sense for your situation.
Note that you can pursue all of these methods at any time—either before or after your debt is sent to collections. However, the earlier you act, the better your chances are.
1. Check your original medical bill for errors
Hospitals and clinics have been known to make mistakes. If you were overcharged or sent bills for procedures you didn’t actually undergo, you don’t have to pay them.
To dispute an illegitimate charge with your healthcare provider, contact them and explain why you believe it’s a mistake. To dispute a debt with your debt collector, send them a debt verification letter obligating them to provide evidence that you actually owe the debt.
If your dispute is rejected—which could happen, if your provider and/or collector are convinced you do owe the debt—your final recourse is to hire an attorney and pursue the issue in court. This obviously isn’t something that anybody wants to do, so try to address erroneous charges as soon as you can to increase your odds of success.
2. Check whether your insurance will cover the debt
If you haven’t already done so, see if your health insurance provider will cover some or all of your medical bills. If they will, you might be able to sidestep the whole issue.
As with the first method, this is something you can do even after your debt is sent to collections. In fact, due to special laws concerning the reporting of medical debt, if your insurance pays off a medical collection account, it will be removed from your credit report entirely. This means it will stop affecting your credit score, regardless of what credit scoring model your lender uses. 6
3. Negotiate your bill with your healthcare provider
If you have a (legitimate) bill that you can’t pay, contact your healthcare provider about it and honestly explain your situation. Say that you want to pay what you owe, but you just can’t afford to.
Hospitals and clinics don’t like dealing with debt collectors any more than consumers do. If you show that you’re serious about paying, there’s a good chance they’ll be willing to work out a payment plan with you where you’ll pay down your debt in manageable monthly installments.
They might also reduce your total debt if you can pay the reduced amount upfront, or in cash. 2
4. Hire a medical bill advocate
If you don’t want to deal with your healthcare provider on your own, you can hire a medical bill advocate to do it for you.
A medical bill or patient advocate is a professional who will negotiate your medical bills on your behalf, and who can help you review and even appeal them.
As you’d expect, these experts will charge you a fee for their service. This cost is either an hourly rate or a percentage of the amount they save on your bill. Before you hire a medical bill advocate, make sure that their fee will be outweighed by the money you’ll end up saving.
5. Get a medical credit card
Many healthcare providers offer specific credit cards to help you pay off medical bills. These cards can only be used for healthcare expenses. Like regular credit cards, they have different interest rates and fees that you should consider before applying.
If you end up using a medical credit card, try to get one with a promotional 0% APR period (in which you’ll pay no interest). Try to pay off your bill within the intro period so you don’t get hit with high interest charges after it ends.
Note that if you pay your medical bill with a credit card, you’re not eligible for a payment plan. 2
6. Pay off your debt with a loan
Similarly, if you have a relatively good credit score—which is more likely if your medical collection account hasn’t appeared on your credit report yet—you might also be able to qualify for a personal loan, which you can immediately use to pay off your debt.
Paying with a loan comes with obvious downsides. Obviously, you’ll have to pay back the loan, which might actually cost more money in the long term than paying off your debt normally, depending on your loan’s interest rate.
However, this option can buy you some time and keep the medical collection account off your credit report. Just be sure to only take out a loan you can afford; if you repeatedly miss payments, your loan might also get charged off and lead to a collection account of its own.