Our counselors regularly meet with clients who have bills for past medical services on their credit report, and a question we hear quite often is “Should I pay a medical bill in collections?” This is always tough to answer, even when talking about debt in general, because there are quite a few considerations.
For instance, you should be familiar with the new rules for how FICO treats medical debt, which are more favorable to consumers. And then there’s the age of your debt and how that factors into the decision. And, of course, there’s always an ethical dimension to a question like this, so you have to make the choice that aligns with your values. Let’s take a closer look at how to approach this decision along with the information you’ll need to have in hand.
Some Important Considerations
We’ve covered how the new FICO score affects medical debt in detail, but the gist is this: When you pay off a medical debt in collections, the collection activity is permanently disregarded in the calculation of your FICO score. This is great news and, as we will explain, provides incentive to pay off an old medical debt. But, there are two caveats.
First, not all lenders are using FICO 9, the new score that treats medical debt in this favorable way. So, there’s no guarantee that you will reap this benefit.
Second, and perhaps more importantly, FICO still uses any negative marks created by the account before it was sent to collections in its calculation of your score. This means that if the original creditor or service provider (a dentist, for example) reported you to the credit bureaus as delinquent or “late” before sending the account to collections, you cannot undo that negative impact.
This is problematic because it’s not a uniform standard. In our experience at Clearpoint, it’s rare for an original provider to report directly to the credit reporting agencies. What’s easier, and often less expensive, is to sell the debt to a third-party collection agency instead who handles all of this on their behalf. And for consumers, that’s the ideal outcome, because if there is no original reporting, the situation (in terms of credit damage) can be totally repaired by paying of the collection account.
The CFPB, in their 2014 report on medical collections, found this to be generally true as well. They report:
Bureau interviews indicate that nearly all healthcare providers that permit reporting prefer to allow their contracted collection agencies to report the unpaid accounts to credit reporting agencies as opposed to reporting the unpaid accounts themselves.
But some providers operate differently and for a variety of reasons, such as having a more streamlined infrastructure, may report a late status directly to the reporting agencies long before involving a debt collector. This is bad for consumers’ credit and hard to predict. It varies by provider and, to an extent, by industry. There is not readily available data on this problem, but from our experience dental and vision providers are much more likely to do this than large hospitals or lab companies.
Questions to Ask
As you evaluate whether repayment makes sense for you, you’ll need to ask the following questions and take the appropriate steps to resolution.
Did the original creditor report directly to the credit bureaus?
It will be helpful for you to know what you’re up against—one type of negative mark (the collections activity), or two (the collections activity and the original delinquency). To know this for sure, you will want to pull all three copies of your credit report at www.annualcreditreport.com.
Once you have this information in hand, you can better evaluate how to move forward. Paying off the collections account will have a positive impact to your FICO 9 score, but if the original delinquency is also listed, the positive impact may be less significant.
How old is the debt?
This is a really important question to ask. If you have an original negative mark, that’s going to stay on the report for a total of seven years. The collections account will also negatively affect your credit for seven years if you don’t pay it off. If you are nearing the seven-year period, you may receive much less net benefit to paying off the account, since it will soon be off anyway.
What is the statute of limitations?
This is also important to know. While the debt will affect your credit score for seven years, that’s actually different than your legal responsibility to the debt. That’s determined by the statute of limitations in your state. It’s important to know this as well. There’s no legal reason to pay off a debt beyond the statute of limitations, but it might still help your credit. If your statute of limitations is shorter than your seven-year period, the same principle mentioned above holds true—it’s a good idea to pay it off early, but much less so as you approach seven years. But also, keep in mind that if your statute of limitations is longer than seven years, you will still be legally responsible for that debt, which means you could face a lawsuit.
If you want to know more about old debt and how to handle collectors, be sure to read our post about zombie debt.
Can I settle?
If paying off the balance in full is part of your dilemma, settling may be a great option. In general, settling a debt creates its own negative comment on your credit report, but luckily medical settlements are treated differently. Just as with medical collection accounts paid in full, FICO 9 ignores settled medical accounts.
For starters, try offering the collector one third of the total balance and negotiate from there. Keep in mind that any amount forgiven that exceeds $600 can be declared as income, so you should receive a 1099 at the end of the year and it may have tax implications. Also, be aware that there are many for-profit debt settlement firms who make big promises but may actually do more harm than good! We recommend trying this tactic on your own, rather than working with an outside firm.
Prioritizing your Repayment
We recommend working on the newest debts first, because they will be showing on the credit report the longest and are farthest away from reaching your state’s statute of limitations. The only exception is if the creditor is taking legal action against you. In this case, you should appear in court if summoned, explain your situation, and make a payment arrangement.
In the future, reach out to the provider right away when you receive a medical bill. By applying for “financial aid” or an in-house payment plan, you can keep the debt from going into collections and damaging your credit. Check out our in-depth look at how to negotiate medical expenses before and after your receive a bill for more information and cost-saving tips.