Catastrophic illness can have a devastating effect on your finances if your health insurance covers only part of the cost, and your only choice is to charge the rest on your credit cards. This puts you at serious risk of defaulting on your credit accounts. At best, you rack up a few late charges and accept that you won't be buying a car or home for the next year or two. At worst, you could wind up in bankruptcy and suffer the consequences for many years to come. Stack the deck in your favor by contacting your creditors as soon as you know you're in trouble. Most have programs that can help.
Anatomy of a Default
You can land in default status even if you make partial payments. Partial payments are amounts less than the minimum due. The Federal Deposit Insurance Corporation allows lenders to combine the unpaid portion of each bill and count them as a missed payment once they equal one month's minimum amount due. You've officially missed a payment once your account is 30 days past due. At 60 days, creditors typically move delinquent accounts to their collection departments. Most close accounts, at least temporarily, at 90 days past due. It's crucial that you take action before you're 120 days late. That's when creditors charge off debts and sell them to collection agencies.
A workout plan, also called a debt management plan, is designed to help consumers who are seriously over their heads financially because of life-altering issues, including catastrophic illness. The FDIC encourages banks to structure workouts so debts are repaid within five years. Creditors can reduce interest and eliminate fees to help you meet the workout plan's goal. MSN Money notes that your credit score won't take a hit just because you're in a workout plan. However, you may lose points because your creditors will close your accounts, thereby increasing the percentage of available credit you have outstanding.
A hardship program might be an option if you expect your health issues to have only a temporary effect on your finances, and you paid your bills on time before the health issues occurred. It works best for consumers who can resume regular payments within a year. In the meantime, the creditors may reduce your payments or issue a forbearance that eliminates payments for a time. The creditors won't let you use your cards while you're in their program, but many will reinstate your accounts as soon as you've caught up. Creditors may report your participation in a hardship program to credit bureaus as a negative event.
Consumer credit counseling services work with consumers who have overwhelming debt but aren't at the point where bankruptcy is the only option. The counselor helps you create a budget you can afford. She also negotiates with your creditors to reduce your interest rates, forgive fees, and work out new payment arrangements. Once your program starts, you make one payment each month to the credit counselor. The counselor pays the creditors on your behalf. You pay a fee for the services, and because you must put all your cards in the program you can't use credit until the program's completion. That could be several years. As with a workout program, credit counseling doesn't hurt your credit score but the closed accounts may. However, some creditors agree to re-age your accounts once you've paid up so they appear on your credit report as accounts in good standing.
Some lenders devote whole sections of their websites to their credit card repayment programs. These sites emphasize the importance of getting help as soon as you know you're in trouble. Even with this encouragement, you may have to go through a few levels of customer service before you get someone who can get the ball rolling. Gather enough information to decide what kind of program you want before you ask to be considered. Once you've told the creditors you're having trouble, most have to take action by restricting your use of the cards. Have your income and expense information ready when you report your hardship. Also, prepare to discuss your health issues in factual, objective terms. The better case you can make for eligibility, the sooner you can focus on recovery – from your health problems and your credit card debt.
- Wells Fargo: Credit Card Help Center
- Fox Business: How to Restructure Credit Card Debt
- Clearpoint Cedit Counseling Solutions: Using a Credit Card Hardship Program
- FDIC.gov: Credit Card Activities Manual
- Today Money: What if You Stop Paying Your Credit Cards?
- MSN Money: Escaping Debt Can Hurt Your Credit
- Nolo.com: Negotiating on Credit Card Debt
- BananaStock/BananaStock/Getty Images