Medical debt is one of the leading causes of bankruptcies in this country. For this reason, most doctors and hospitals are willing to work with patients to come up with a reasonable payment plan.
Dear Keeping Score,
Hi. My brother and I have an S-Corp business together, with each holding 50 percent of stock. The business is his job, and only source of income.
Last year my brother was shot and had a two-week hospital stay. He did not have health insurance. His medical bills amount to around $235,000, and there is no way he can afford to pay that. He also made some unpaid credit card debt.
My question is, what can creditors do to our business? Can they seize our assets? That would destroy the business, and leave him without any source of income, not to mention negatively impacting my share of the business interest. Thank you very much. – Clay
I wish your brother was writing to me instead of you. This indicates you are more committed to a solution than he is. But either way, I’m glad one of you reached out for help. Let’s deal with your brother’s debts first and then we’ll touch on your business.
Your brother’s predicament is proof of why medical debt is one of the leading causes of bankruptcies in this country. For this reason, most doctors and hospitals are willing to work with patients to come up with a reasonable payment plan.
If the patient files for bankruptcy, they could be left with nothing. And something is better than nothing, right? In addition, bear in mind that hospitals and particularly doctors don’t see themselves as creditors or collectors. The hospitals are community service providers and the doctors are medical artists.
So, I would suggest your brother not delay in having a frank discussion with his health care providers to see if they can come up with a payment plan he can manage. Believe it or not, you can negotiate medical expenses.
Most providers have more than one rate for the same service or procedure – the insured price and the uninsured price. Because they negotiate prices in advance, insurers often get a lower price than individuals paying out of pocket. Asking for a discount is nothing new and asking for insurance company pricing shouldn’t cause any heart rates to rise at his provider’s office.
Many hospitals and doctors’ offices consider helping those who can prove that they are under unusual financial duress because of increasing medical costs or decreasing incomes. But if your brother plans to apply for any medical financial help he should do it soon, as many providers have a 6- or 12-month limit on aid applications.
How unpaid medical bills affect your credit score
Medical bills are treated differently from run-of-the-mill debts by the credit reporting agencies. Medical delinquencies won’t show on his credit report for six months. This is in recognition of the delays in getting medical bills processed, corrected, submitted to insurers (not in his case) and finally agreed to.
This means you have some breathing room here if his shooting was late in 2018.
Of course, until the medical bills hit his credit report, his score won’t be impacted. Even then, medical delinquencies are scored differently from your garden variety of overdue bills under the newest FICO scoring model.
Medical collections can hurt your FICO Score, but FICO Score 9 differentiates medical from non-medical collection agency accounts. (It should be noted that FICO 8 – which doesn’t differentiate medical and non-medical collection items – is still the most widely used model.)
This helps ensure medical collections have a lower impact on scores, which is more commensurate with the credit risk they represent. Unpaid medical bills sent to collections have a smaller impact to the FICO 9 score than unpaid non-medical collections, while paid collections of any type are not considered.
Outside of bankruptcies and collections, medical bill information is typically not found on the credit report and therefore would not impact his FICO score.
One last thought, and it is a long shot, but some hospitals are covered by the Hill-Burton Act. Ask if your brother’s is. Facilities covered by this act must provide certain uncompensated services to those who qualify.
Credit card debt management options
As for dealing with the credit card debt, your brother does have options. I recommend reaching out to a nonprofit credit counseling agency for help. A credit counseling agency may be able to help with negotiating a repayment plan with either the providers or their collectors (if it gets to that stage) of your brother’s debts.
Just be sure he works with an accredited nonprofit agency, like those associated with the National Foundation for Credit Counseling. These are the good guys who will take every aspect of your brother’s situation into account to find the right solution. They should explore all options, including bankruptcy.
Bankruptcy is an extreme remedy, but it may be a valid option for him. A chapter 7 or chapter 13 bankruptcy may work if all else fails. A chapter 13 should preserve his business interests but reduce his free cash flow. If he ultimately chooses that route, I strongly advise that he use an experienced bankruptcy lawyer to handle his filing.
Failing all of the above, he can try to settle his debts for a cash payment. Unfortunately, this requires a chunk of cash to be paid at once. Here again, I strongly advise using an attorney to negotiate the deal – not a debt settlement company.
Last is my least favorite solution – he can simply ignore the debt, but I strongly advise against doing that. Because of the large amount owed, it’s more likely that the debts will be turned over to a third-party collector at some point. But, they may not. Doctors and hospitals are unpredictable.
Don’t delay in getting qualified legal help
As for the corporate safeguards offered by a chapter S-Corp, my best advice is to have a frank discussion with a qualified lawyer (which I am not). Don’t delay in getting some honest-to-goodness qualified legal help to protect your business interests. Your local legal aid can help you find someone if you don’t have your own lawyer.
Finally, I might also suggest your brother, or the company, at least consider purchasing a catastrophic insurance policy. Here’s hoping that lightning won’t strike twice, but who can say?
Remember to keep track of your score!