No matter which debt relief option you end up choosing, the impact it may have on your credit score is one factor to consider. Though obtaining bankruptcy relief does affect your credit score, so does leaving your debts unresolved.
You don't want to end up being denied credit because your credit score is too low.
But what exactly is the impact on your credit score of unpaid debt? It depends, in part, on the type of debt.
Most debts that go unpaid are handed over to collection agencies and to one of the three credit reporting agencies - Experian, Transunion or Equifax. Medical bills, however, are handled differently in many respects.
Problem of Unpaid Medical Bills
The Federal Reserve estimates that about 14 million people have medical bills that have not been paid or that they are having difficulty paying. Many medical bills that are incurred after surgery or a hospital stay might not be billed to the patient for weeks or months afterward. The bills often arrive in confusing batches that are frequently difficult to decipher. It is often unclear which costs are covered by insurance, and the insurance company might not notify the patient of which amounts are not covered.
Health-care providers generally prefer not to go after late-paying patients themselves. Instead, the providers often hand over the bills to a collection agency at greatly reduced rates. The providers rarely report the debts to a credit agency, as this would subject them to certain reporting regulations.
Role of Collection Agencies
Collection agencies typically report the debts, regardless of whether or not they contact the debtor for collection. Once that happens, the debtor's credit report can show the late or unpaid debt for up to seven years. This can severely affect a credit score. Collection actions are considered the most damaging aspect of a credit report.
Additionally, a debtor might not be able to determine from the credit agency the origin of the debt because of privacy constraints on the agencies.
Congress is considering changes that would require a credit agency to remove a debt that has been paid after 45 days. But the proposal is unlikely to pass this year.
What You Can Do
Consumers can protect themselves by staying in touch with health-care providers regarding their bills and by contacting their health insurers about costs that might not be covered. Debtors can also contact the collection agency and secure a promise not to have the debt reported to a credit agency in return for paying off the bill.
But if you are unsure about how to proceed, it makes sense to contact an experienced bankruptcy attorney to discuss all of your debt relief options.
