Before you write a check for your medical bills, consider health-care financing or a home equity loan.

Before you write a check for your medical bills, consider health-care financing or a home equity loan.(ISTOCKPHOTO)

Snowballing medical bills cause about half of all bankruptcies, according to a 2005 Harvard study. Even middle-class people with good health insurance can quickly become mired in debt if they fall ill and cant work.

“What happens is, someone in their 50s has a major heart attack. Even with good insurance, their share is $50,000 and they put it on a credit card,” says Winchell Dillenbeck, executive director of the Consumer Credit Counseling Service of the North Coast, in Arcata, Calif., a nonprofit community service agency. “With a chronic condition, they keep piling more and more on the card. Meanwhile, their health limits the amount they can work, they have less income, and they struggle to stay a step ahead of the creditors. Eventually the minimum payment outgrows the affordability.”

Whether you need to pay for experimental surgery that is not covered by insurance, unreimbursed cancer therapy after youve maxed out your policy, or modifications to your home so you can live there longer, here are some resources to consider if you need assistance paying your medical expenses.

Health-care financing
You may have seen brochures in your doctors office for health-care financing, which is often used for elective medical procedures—such as laser eye surgery, plastic surgery, and cosmetic dental work—that arent covered by insurance. These loans, from lenders such as Bank of America and CareCredit (a division of GE Money), are an option for paying your major medical expenses, but financial advisers warn that they can be expensive. “There are lots of them out there charging 19% to 29% interest,” says Chris Cooper, a certified financial planner and social gerontologist in Toledo, Ohio.

Consumers with good credit may be able to find a deal on these loans by taking advantage of zero-interest offers, which typically give you 12 months to repay without incurring any interest. But beware: These unsecured personal loans are similar to credit cards. If you miss a scheduled payment, or dont pay off the balance within the specified period, you may face interest rate hikes as high as 12% to 29%.

“Its a huge rip-off if youre asked to pay medical bills at 27% interest,” says Dillenbeck. Even in todays tight credit environment, your goal should be to get a rate of 10% or less, and if youre not sure whether you can meet the payment terms, look elsewhere for cheaper sources of funding.

Life insurance policies
If you have been paying premiums on a life insurance policy for a long period of time, the policy has some cash value that could be exploited as a source of funds. You could either cash in the policy or borrow against it. The latter can be advantageous because the interest rates tend to be low—5% to 8%, typically. Be sure to speak with your financial planner or accountant before you take this step. If you want to borrow against the policy, you need to ensure that the interest that accrues to the policy balance will outpace the interest on the loan. And if you subsequently cash in the policy or let it lapse, the full value of the policy (including the borrowed amount) will be subject to income tax. “You have to make sure cashing in your insurance is OK with the rest of your financial plan,” Cooper says.

Credit unions
Credit unions are nonprofit, member-owned financial institutions that usually offer loans with interest rates lower than those at a commercial bank. Ask your human resources department if your employer has a relationship with a credit union that you can join. Ask family members if they belong to a credit union—often you can join if your relatives are members. Visit the website of the National Credit Union Administration, a federal agency, to find a credit union by city, state, or type.

Home equity loan or line of credit
If you own your home and have a good credit score (around 750 or higher), a home equity loan can be one of the most inexpensive sources of funds available. The rate (usually variable) runs around 8% or 9%, a good deal compared to most other options. Plus, “if you itemize your tax deductions, a home equity loan might be your cheapest source of money because you can deduct the interest,” says Cooper.

But before you use your home equity for medical expenses, think about the broader financial picture for your family. If you are unable to pay off the loan, you risk losing your house. An even more sobering scenario: “If you borrow the guts out of your house to pay for an operation and the person dies, what is the family or spouse going to do?” says Cooper.

In some cases, however, a home equity loan used for medical reasons may actually increase the value of your home. Using a loan to make medically necessary modifications to your house, for instance, can have a long-term benefit, depending on your property type and its location.

“More people are starting to need homes with elevators, or ramps for wheelchairs,” says Cooper. “Putting an elevator in a two-story house might be a very good investment.”

Reverse mortgages
People age 62 and older who own a home are eligible to apply for a reverse mortgage, a program which converts home equity into a bank loan or line of credit. You make no payments to the bank until you (or your heirs) sell the house, at which point the bank recoups its money from the proceeds. (If you move out for longer than 12 months, you will need to repay the bank then.) “We counsel people who are trying to avoid bankruptcy, and many of them do not know that a reverse mortgage is an option for them,” says Scott Scredon, spokesperson for the nonprofit Consumer Credit Counseling Service of Greater Atlanta.

The amount of money you can borrow depends on your age, current interest rates, and the appraised value of your home. (An easy-to-use reverse mortgage calculator is available on the AARPs website.) You may want to consider a reverse mortgage if you have no other means to pay for urgent health care and are likely to live in your home for the foreseeable future. If, on the other hand, you expect to move out within a few years, can afford the monthly payments on a traditional home equity loan, or have access to other funds, you may want to think twice.

“This should be used as a last resort. You dont want to do it until youre very advanced in age,” says Cooper. “You want to wait as long as possible. A reverse mortgage is like a pension: The earlier you draw your pension, the less payment you get, but you get it for a longer period of time.” However, Cooper says that people might want to consider taking out a reverse mortgage earlier if there are signs that the value of property in their area is decreasing (for example, if the population or the property tax rate is on the decline).

Before you can take out a reverse mortgage—roughly 90% of which are insured by the federal government—you are required to receive information from a counselor approved by the U.S. Department of Housing and Urban Development, to make sure you understand the terms.

“People need to know that reverse mortgages are expensive loans with high upfront costs,” says Donald Redfoot, strategic policy adviser at the AARPs Public Policy Institute. “They are not to be entered into lightly. They are for people who want to stay put in their homes, so if the nature of their health or disability requires them to move to get care, this would not be a good option.”

The funds can be used for anything, even daily living expenses, but they are often used for health-care expenditures that are not covered by health insurance or Medicare, such as prescription drugs, home care, modifying a home for wheelchair access, or the purchase of a specially equipped van, Redfoot says.