No one likes to think about being unable to pay their bills—especially when these are expensive medical bills and living expenses that need to be covered after you’ve been injured in an accident that was no fault of your own. But, think about this: If you were injured in a personal injury accident what would you do? What funding streams would cover your costs?
What is Self-Funding?
Medical expenses from a personal injury accident can easily skyrocket to become hundreds of thousands of dollars. Easily. Do you have $100,000+ in your savings or your “rainy day” account? Most people don’t.
Self-funding, or paying for your medical bills and accident-related fees on your own, is one option, but since most Americans don’t have $100,000 laying around in their couch cushions or stashed in their bank accounts, how would someone come up with money like this?
Charging these medical bills to your personal credit card(s), tapping into your 401(k), or asking friends and family may seem like a good immediate alternative funding stream, but in the long run, self-funding can cripple you—and those around you—financially.
“I’ll just charge it to my credit card.”
Good credit takes years to develop. The better your credit score, the more options you have. A decent credit score unlocks opportunity and lowers interest rates, especially when you’re looking to buy a home or a car. Bad credit equates to higher interest rates, meaning you’ll be paying more over time.
While personal injury plaintiffs may want to settle their medical bills and balances to zero with one swipe of their credit card, avoid accumulating credit card debt. Interest rates are on the rise. Right now, the average interest rate for a new credit card is 19.24 percent, and for existing accounts it’s 14.14 percent. And, don’t expect a zero percent promotional rate to last as long as you’ll need it to in order to decimate the debt. Promotional rates are temporary. On top of your growing debt and calculated interest, when you fail to pay the minimum payment, expect to also fork over an average penalty APR of 26.18 percent.
“I’ll just tap into my 401(k). This counts as an ‘immediate and heavy financial need,’ right?”
Many 401(k) plans do provide for elective deferrals for hardship distribution. Certain medical expenses from personal injury accidents may qualify as immediate and heavy, but know that when you take a hardship distribution from your 401(k), not only will you pay a 10 percent penalty, this money is also considered ordinary income, so normal tax rates apply.
Taking money from a 401(k) is not a loan, so hardship distributions aren’t ever repaid. As the IRS states, “Thus, a hardship distribution permanently reduces the employee’s account balance under the plan.”
Reaching into a 401(k) is like stealing money from your future self and getting taxed for it. What could that money be earning for you if you were to leave it there instead?
“I’ll just ask my friends and family for help.”
Friends and family can only do so much. If you had seven willing family members who agreed to help you tackle your $100,000 of medical bills, they’d each be giving you a check for about $14,290. Do you have seven relatives who’d be willing and able to share that amount of money with you without any strings attached or stipulations?
In a moment of need, close relatives and friends may be eager to help, but you also need to consider the future. What’s your plan for paying these family members back? Who will you pay back first? How might owing seven payments of $14,290 to your family members strain your relationships with them? How might this debt affect your life and living expenses moving forward?
Medical Funding is a Smarter Option
Medical funding is another alternative to self-funding. Receiving money through non-recourse funding sources allows you to cover the cost of medical bills and living expenses like rent, utility bills, and car payments, while your case works its way through the court system—without crippling your financial record. Non-recourse means you only pay the money back if and when you win or settle your case.
Keep your credit cards in your wallet, the money in your 401(k) where it belongs, and your friends and family out of your financial arrangements. Medical funding is the smarter choice.