The Wall Street Journal recently published a new story entitled Hidden Medical Debt Trips Up Homeowners. The report documented several cases in which small medical bills that had been turned over to collection resulted in a more than 50 point drop in a homeowner’s credit score.
In one situation, a homeowner attempted to refinance his mortgage, only to discover that two unpaid medical bills totaling less than $50 had caused his credit score to drop. As a result of the lowered credit score the refinancing bank demanded over $4,000 in closing costs.
In another situation, less than $500 of medical debt reported to a collection agency disqualified a homeowner from a favorable interest rate, which would have resulted in tens of thousands of extra interest charges.
In many of these situations, the consumer never knew about the unpaid medical debt – the provider simply turned the claim over to a collection agency which immediately reported it to the credit reporting agencies as delinquent debt.
According to the Journal, “otherwise well-qualified borrowers with good loan-to-value ratios and steady employment are increasingly finding it difficult to refinance because of medical billing mistakes marring their credit.”
If you or a loved one has been in the hospital, you probably know that a single visit can result in five, ten or even more bills from separate vendors – the hospital, the hospital pharmacist, the anesthesiologist, the ambulance service, etc. I do not find it surprising at all that a patient would not know about one or more bills.More on Tiny, Hidden Credit Report Errors Can Lead to Bankruptcy
With the decline in Atlanta area housing values, a seldom used bankruptcy technique has taken on new life. The technique is called “lien stripping” and it arises from Bankruptcy Code Section 506(a) and (d). A lien strip allows a Chapter 13 debtor to use the power of the Bankruptcy Court to transform a secured second mortgage or home equity line of credit into an unsecured debt, thereby eliminating a monthly payment and reducing total debt by tens of thousands of dollars.
Here’s how it works: Let’s say that you own a home worth $250,000. Perhaps that home was worth $350,000 three or four years ago but its market value has dropped because of the recession. The balance on the first mortgage is $270,000 and the balance on the second mortgage is $45,000.
In this case, a Chapter 13 debtor can ask his bankruptcy judge to “strip away” the second mortgage debt since all of the value in your home is encumbered by your first mortgage. In other words, if you were to sell your house, the first mortgage lender would not be paid in full and the second mortgage lender would get nothing. The second mortgage lender is, therefore, unsecured.More on What is “Lien Stripping” and Can I Use it to Reduce my Mortgage Payments
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