Can you negotiate medical debt with collectors?

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert

Dear To Her Credit,
I had heart trouble in 2010, which landed me in cardiac ICU for three days. I had no insurance.

I applied for a grant with the hospital, which took care of all my hospital medical expenses. I also got a bill from a doctor who saw me in the hospital. I called and explained my financial situation. The doctor's office had me apply for assistance, but I did not qualify as by this time I had gotten a job and was just over the poverty level.

Before I could come up with any money, I had more health problems and the debt went to collections. I contacted the collection agency, and the last thing they told me was that it was in "dispute" -- and that if I indeed still owed the money, they would contact me. I had not heard from anyone until recently. The original bill was $2,000, but it's now $2,500 with interest.

I currently have insurance and a job, and I would like to end this. Do you think it is possible to negotiate with them for a lesser amount?  -- Jodi

Answer for the expert

Dear Jodi,
You have already taken important steps to resolving your medical bills. Many people avoid bills they can't pay because they're embarrassed or they don't know what else to do.  You proactively contacted the hospital, the doctor's office and the collection agency. You even found a job with insurance -- no small feat these days. You're on the right track!

The first thing to consider with this bill is whether it is past the statute of limitations. If it's been three years, that's possible. The statute of limitations varies from three years to six or more, depending on your state laws. The statute of limitations generally starts when an account becomes delinquent or when you last made a payment.

If this debt is approaching the statute of limitations in your state, the collection agency may have contacted you hoping to re-age the debts. If they can get you to acknowledge the debt or make a small payment on it, they may reset the clock, so to speak. Be very careful what you say to a collection agency on the phone or by mail in a case like this.

Collection agencies can afford to take less than you might think for debts because they buy them from businesses such as your doctor's office for pennies on the dollar, expecting to collect on some of them.

If you want to resolve this debt by settling it, you have a good chance of doing so for less than the full amount. You may want to save up until you can pay 25 percent of the original amount. The collection agency should be more impressed with an offer of a lump sum than with promises to make payments.

If they don't accept 25 percent, try again with a higher amount. Many people come to an agreement significantly below the current balance they owe a collection agency.

Before you send any money, make sure they agree to the settlement in writing. Have them sign it, and when the paperwork comes back to you, go ahead and pay the agreed-upon amount.

A debt settled for less than the full amount will appear on your credit report, along with language indicating it wasn't paid in full. However, it will age off your report seven years after the doctor's office charged off the account. You may be almost halfway there. Even while the settlement shows on your report, the further it recedes into the past, the better.

You should also get a Form 1099-C from the collection agency after they cancel the debt. The IRS considers forgiven debt to be taxable income. However, if you were "insolvent" prior to settlement of the debt, meaning your liabilities exceeded your assets at that time, you can file Form 982 to claim an  exclusion to paying tax on the canceled debt.

Settling a debt isn't a perfect solution, but it does mean the end of phone calls and letters or worrying about an unpaid bill. Now that you have a job with insurance, you can build a better credit history -- one month at a time.

See related: What lump sum should I offer to debt collectors to settle?

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Updated: 03-26-2019