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Almost half of Americans are holding onto medical debt, according to a 2022 poll (1) from the Kaiser Family Foundation (KFF).
And many of them reported struggling to keep up with those bills, letting them slip past due or into collections. Others said they’d gone to family and friends, or even used credit cards, to foot the bill for medical expenses.
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Imagine Sam and Alison, a couple struggling to pay their bills after a sudden illness in their family left them with $50,000 in medical bills that they put on credit cards. Now, five years later, they feel like they’ve barely made a dent in that debt, and they’re barely able to make minimum payments.
Even if they manage to keep up with the $2,000 monthly minimum payments, it will take them more than 20 years to pay down their debt.
And they will end up paying nearly $40,000 in interest.
Since only one of them is able to work, they’re starting to wonder if they’ll ever manage to dig themselves out of this hole. At this point, they’re not sure whether they should try a debt settlement program, work with a credit counselor or file for bankruptcy.
Here’s what they might want to consider for each option.
Using a debt settlement program
Debt settlement programs, which are offered by for-profit companies, can be risky, the FTC warns (2). These companies will negotiate on your behalf with your creditors, offering a lump sum that you will agree to pay and is less than your debt.
But it comes with a risk.
“Meanwhile, you have to set aside a specific amount of money every month in a designated account until you have enough savings to pay off the amount in your settlement agreement,” the FTC says.
In other words, the programs typically “encourage you to stop making any monthly payments to your creditors.”
But if Sam and Alison choose this option and stop making payments, but then the debt settlement company fails to reach a settlement agreement with their creditors, they’ll be in a worse position than before — as they’ll owe even more in late fees and interest.
Plus, with debt settlement programs, they still have to be able to make all the payments on time to pay off their debt.
That’s why the FTC warns consumers should be incredibly careful when exploring this option: “Some debt settlement companies are dishonest and make promises they can’t keep, charge you a lot of money, and then do little or nothing to help you.”
Another option to manage debt is working with a credit counselor to make a debt management plan, which is different from a debt settlement program.
A debt management plan is typically a payment schedule for you and your creditors, possibly with lower interest rates or waived fees, that is put together with the help of a credit counselor (2). Then, once you’ve negotiated a payment plan, you deposit money with the credit counseling organization every month, and your counselor pays your creditors according to the plan.
Finding a credit counselor is also straightforward. You can search for credit counselors through credit unions, universities, U.S. Cooperative Extension Service branches and military personal financial managers.
But again, you might want to be careful with this option.
It’s a good idea to be wary of credit counselors who don’t offer any free information, the FTC warns. You’ll also want to avoid those who’ll charge you a lot of money before they do anything, say they can fix all your problems or don’t take the time to carefully review your finances. Finally, the FTC cautions against working with a credit counselor who’ll tell you a debt management plan is your only option.
However, if you’re unsure about a credit counselor, you can always check them out with your state attorney general or local consumer protection agency.
Declaring bankruptcy
For some individuals, the best course of action when it comes to unmanageable debt might be bankruptcy. But because of its long-term impact on your credit, bankruptcy is often viewed as a last resort. If you’re working with a reputable credit counselor, they can help you decide whether filing for bankruptcy makes sense.
For Sam and Alison, or anyone else struggling to make their minimum payment, bankruptcy may be the right choice if the debt is too overwhelming, it isn’t possible to make repayments while managing to pay for basic necessities, it will take many years to pay down the debt (some experts say more than five years) or the debt is having an impact on a relationship.
Also remember that if you do file for bankruptcy, you’ll have to pay filing fees, which can be several hundred dollars, plus attorney fees, the FTC says (2). Before filing, you’ll be required to undergo pre-bankruptcy credit counseling as well.
Additionally, for Chapter 7 bankruptcy, you’ll need to pass a means test to show that you qualify. With Chapter 7 bankruptcy, you must liquidate all your assets that aren’t exempt — such as cars, work-related tools and basic household furnishings — while for Chapter 13 bankruptcy, “the court approves a repayment plan that lets you pay off some of your debts in three to five years, rather than give up any property,” the FTC says.
Finally, it’s worth noting that bankruptcy doesn’t get rid of debt related to child support, alimony, fines, taxes or most student loans.
Making a plan to get out of major debt can be a big challenge. For a couple like Sam and Alison, talking to a non-profit credit counselor can be a good first step to help decide which option makes sense for them and their family.
In addition to these measures, however, there are other, smaller strategies that can be used to alleviate money problems.
Consolidate your debt
Like it did for Sam and Alison, medical debt has become a financial reality for millions of Americans.
While roughly 100 million people carry some form of medical debt, about 7.4% of U.S. residents face “catastrophic” healthcare expenses each year — more than double the rate seen in any other developed nation, according to Forbes (3).
If you’re trying to recover from a costly medical bill while also juggling credit cards, personal loans or other high-interest balances, the burden can feel overwhelming. That’s why simplifying your finances can be an important first step toward debt relief.
For instance, rather than keeping track of multiple due dates and interest rates, consolidating your debt into a single personal loan can make repayment more manageable, and it may even lower your overall borrowing costs.
Finding the best debt consolidation loans
If you’re looking for the debt consolidation loan that’s best for you, platforms like Credible let you comparison-shop for the lowest interest rates for free with just a few clicks. In minutes, you’ll see all the lenders willing to help pay off your credit cards or other debts with a single personal loan.
For those who owe a substantial amount, you may also want to see if you qualify for a debt relief program to help clear a significant portion of your debt. With Freedom Debt Relief, you can speak with a certified debt relief consultant for free, who can show you how much you can save by partnering with them.
If you’re eligible, they can negotiate settlements with your creditors until all of your enrolled debt is resolved.
Budget your monthly payments
Consolidating your balances is only part of the equation. The next step could be creating enough room in your monthly cash flow to consistently make those payments.
A detailed budget helps ensure your spending aligns with your income while creating room to aggressively tackle high-interest debt. It can also reveal expenses that quietly drain your finances each month — whether it’s subscription services you’ve forgotten about, frequent takeout meals or recurring bills that could be negotiated for a better rate.
Those small savings may not seem significant on their own, but over time they can free up hundreds or even thousands of dollars to put toward debt repayment and long-term financial goals.
Start tracking your expenses
But budgeting on your own isn’t always easy. That’s where apps like Monarch Money can help you out.
Monarch Money’s expense tracking system makes managing your finances easier. The platform seamlessly connects all your accounts in one place, giving you a clear view of where you’re overspending.
By linking your credit card accounts, you can monitor your payment progress in real time and set specific goals to get out of credit card debt faster.
Even after you’ve paid down debt, one unexpected expense can threaten all the progress you’ve made. A medical emergency, home repair or sudden job loss can quickly force people back to relying on high-interest credit cards if they don’t have cash set aside.
That’s why financial experts consistently stress the importance of maintaining an emergency fund.
“You do need oxygen, and if you’re ever without it for four or five minutes, you will learn,” legendary investor Warren Buffett once said (4). “And cash is that way. So you always need to have it available, because you do not know what will happen.”
In simple terms, saving three to six months of essential living expenses can provide valuable peace of mind.
Finding the right place to put your emergency fund
If you’re looking for a place to park that emergency fund, a high-yield account like a Wealthfront Cash Account can be a great place to grow your uninvested cash, offering both competitive interest rates and easy access to your money when you need it.
A Wealthfront Cash Account currently offers a base APY of 3.30% through program banks, and new clients can get an extra 0.75% boost during their first three months on up to $150,000 for a total variable APY of 4.05%.
That’s 10 times the national deposit savings rate, according to the FDIC’s June report.
Additionally, Wealthfront is offering new clients who enable direct deposit ($1,000/mo minimum) to their Cash Account and open and fund a new investment account an additional 0.25% APY increase with no expiration date or balance limit, meaning your APY could be as high as 4.30%.
The habits that help you get out of debt can also help you build wealth — especially if you continue putting money aside once your balances are paid off.
One important thing to keep in mind is that you don’t need to wait until you have thousands of dollars to begin investing. Starting small and contributing consistently can be just as powerful over the long run thanks to compound growth.
For instance, investing $20 each week for 30 years can help you save over $179,000, assuming it compounds at 10% annually (5).
Start planting the investment seeds
Apps like Acorns allow users to invest spare change from everyday purchases automatically — helping them steadily build wealth without having to think about every market move.
All you have to do is link your cards, and Acorns will round up each purchase to the nearest dollar, investing the difference — your spare change — into a diversified portfolio of ETFs managed by experts at leading investment firms like Vanguard and BlackRock.
Over a lifetime, a little bit of consistency can go a long way.
With Acorns, you can invest in an ETF built and managed by experts with as little as $5 — and, if you sign up today, Acorns will add a $20 bonus to help you begin your investment journey.
— With files from Rebecca Payne
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