What Happens When Medical Bills Go to Collection?

Nearly everyone faces an unexpected medical bill from time to time. Some are lucky enough to have a comprehensive health insurance policy that covers all or most of their bills. Others have the financial wherewithal to handle the cost.

However, many  aren’t so well protected. According to the White House, one in three Americans have medical debt. Of that debt, according to the Consumer Financial Protection Bureau, $88 billion is in collection. If you can’t pay your medical bills, the medical provider can sell your debt to a collection agency to recover the unpaid amount. This can affect your credit score negatively, which can damage your ability to secure loans.

How does medical debt in collection affect your credit?

The good news is that medical debt is now treated less harshly than other types of consumer debt. 

According to the Consumer Financial Protection Bureau (CFPB), it used to be that most healthcare providers started selling outstanding debt to collection agencies after 60 to 120 days or more past due. However, recent legislation (see “What is the 2021 Medical Debt Forgiveness Act?” below) has changed that period to one year past due.

Even better, the CFPB said that the three largest credit bureaus—TransUnion, Equifax, and Experian—announced that all paid medical debts and unpaid debts less than a year old would be removed from credit reports. In April 2023, they extended this to all medical collections under $500.

This extra time gives you more to work with your insurance company and medical provider to try to create a payment plan that keeps that debt from reaching a collection agency.

How to pay off medical debt

The first step is to make sure that you actually owe everything that is on your bill. Scrutinize each item to see if it is correct. The Centers for Medicare and Medicaid Services has a useful checklist to help you with this task. And double-check with your insurance company to make sure it has paid for everything it is supposed to cover. 

Reach out to your medical provider to see if it’s possible to create a payment plan that works for you. Some may offer a medical credit card option. Both of these have risks and can affect your credit. But they could keep your medical debt out of a collection agency. In fact, if you do set up a plan, always put that agreement in writing. Make sure that the plan explicitly states that as long as you are meeting its terms, the provider will not send the unpaid balance to a collection agency.

Another place to look for funds is to take a hardship loan from your 401(k). This is generally not advisable because it endangers your future. But in an emergency, you will not be penalized for withdrawing funds and will be able to pay them back later, with interest that goes to you, not a bank.

Other ways to pay off medical debt are to take out a loan or acquire a 0% interest rate credit card. 

What to do when your medical bills go to collection

If nothing works and your medical bills arrive at a collection agency, it’s time to act. Contact the agency right away and see what you can do to get the bill paid. Needless to say, paying off the bill fast—the best option—is not always possible. There are two widely used alternatives to consider.

Debt management plan

One helpful next step is to work with a nonprofit credit counseling agency to set up a debt management plan to pay off the debt. This generally involves setting up a three-to-five–year program in which you pay the counseling agency and it pays the collection agency. This will likely do less damage to your credit than the next alternative. 

Debt settlement

This strategy involves negotiating what’s called a “settlement” with the collection agency, which means that you agree to pay a portion of the debt. Settling is preferable to continuing to be late on payment and going into default. However, the problem with accepting a settlement is that, because you have not paid the full amount owed, the unpaid portion may remain on your credit report as a negative mark for seven years.

How to rebuild your credit after medical collections

You can always remake your credit profile, even if delinquent bills have gone to a collection agency. There are three steps to take:

1. Pay off your bill (and any others outstanding) in full. 
2. Pay all new bills on time.
3. Pay down your credit card balances. 

The last is especially important, because those balances affect your credit utilization ratio, which helps to determine your FICO score. It is calculated as a percentage. Add up your total debt, divide it by your total credit limit, and multiply by 100. Experts recommend that you don’t let your credit utilization ratio exceed 30%.

Beware: Bills can be sent to collection even if you’re paying

You’re moving along paying off a medical bill, and, surprise, your unpaid balance ends up in collections. What gives?

As noted above, even if you’re paying off your bill, the provider can still send the unpaid balance to a collection agency. That’s why it’s essential to work out a payment plan with the provider and always get that agreement in writing. If no payment plan seems feasible, then it’s time to try negotiating a debt management plan or settlement agreement with the agency. 

Insurance doesn’t cover everything

Your health insurance may pay for the bulk of your visits to your primary care doctor, referrals to see some  specialists, treatment at a hospital, and other costs. However, there are many costs that health insurance doesn’t cover, and there are deductibles, copays, and premiums you must always factor into your medical expenses. 

Be sure to study your health insurance policy to understand the parameters of your coverage. Call its help line to clarify points—ideally before a medical emergency occurs.

What is the 2021 Medical Debt Forgiveness Act?

The 2021 Medical Debt Forgiveness Act is designed to help Americans who are dealing with medical debt by forgiving the debt and helping them get back on their feet financially. It states that a consumer protection agency is forbidden from adding medical debt information to a consumer credit report if the debt was fully paid or settled or is less than a year old. In addition, a debt collector must notify the individual before reporting medical debt to a consumer reporting agency.

Can I stop medical bills from affecting my credit?

As noted above, many protections have been enacted to prevent medical debt from ending up on your credit report. This gives you more time to find a way to pay off, or settle, the debt. 

However, any debt that isn’t protected will show up on your report and negatively affect your credit score. Once that happens, all you can do is work to pay off or settle the debt as quickly as you can.

TIME Stamp: Act quickly if medical debt winds up at a collection agency

If your unpaid medical bills go to a collection agency, it’s not the end of the world. You can work with the agency to find the best way to pay off the debt, whether through monthly payments or a settlement that dismisses a portion of the debt, and make sure that it is eventually erased from your credit report.

Frequently asked questions (FAQs)

Does the record of unpaid medical bills go away after seven years? 

Yes, it does. However, you are still responsible for the unpaid amount, and the credit score impacted by the debt could affect your status when you apply for a loan, an apartment, or a job.

How can I get medical bills off my credit report? 

Contact the collection agency and the medical provider to ensure that inaccurate information about unpaid medical bills is taken off your credit report.

Do outstanding medical bills affect your credit when buying a house?

They certainly can. A low credit score caused by bills in collection can lead to a higher interest rate on a mortgage or even prevent you from buying a house.