Have good credit OR get a discount?

Question

Fellow BP'ers, I need some advice on which direction I should go from here.

For the past year I have been kicking it in high gear in my personal finances by building up my credit in order to get conventional loans on my upcoming investment properties. I have managed to bring my credit score up from 640 to 780 and can see it soon being over 800 with just a little more work.

Having thoroughly enjoyed my time here at bigger pockets thus far, I have been getting excited and encouraged to build up my portfolio more. Well, last month my wife had to have surgery and now we have "been served" the $20,000 hospital bill with a due date on the bill of this month (no insurance).

As I see it, I have a couple options:

1. Organize a payment plan with the hospital only to have them sell it to a factoring company(collection agency) in order to get half of their money sooner than what I would be paying them.

Outcome: Dinged credit which will either keep me from loans or bring higher interest rates.

2. Use some of my equity (2nd mortgage) to pay off the bills quickly.

Outcome: Less dinged credit, but now I would have to pay interest on top of the debt AND I would have used the equity that I could have used to purchase another property.

3. Negotiate a write-off of half the bill with the hospital and pay cash for the remaining balance with my money I have saved for a down payment.

Outcome: I could still have dinged credit because of the write-off AND my cash is now gone.

Does anyone have any suggestions or ideas to minimize my "cons"? Any advice would be very much appreciated. I want to do the wisest thing that will not negatively affect my prospects for deal funding in the near future.

Mehran K. · Answer

You could try to negotiate a full payment (all at once) of a reduced amount like mentioned in option 3, but only with a written agreement that it will not be reported negatively to the 3 credit bureaus. The problem is that usually these types of negotiations don't happen until after it goes to collections. I would say to pay that off with personal funds and get a HELOC on your primary residence to tap the equity. You don't have to get a fully amortized 2nd mortgage to tap it. You could also call them before the due date and talk to them about payment plans. You can ask if the plan is reported to your credit (which it likely will be). This may affect your financing as far as debt-to-income ratios goes. Possibly your credit score a bit as far as credit utilization goes as well. But if the terms are good, you may be able to manage these payments and still invest with the money you've saved up. One or two rentals cash flow could pay this medical bill every month.

Scott Trench · Answer

Daniel,First of all, I want to say that I'm sorry you've been put in this position. I hope that everything went smoothly from a health standpoint with your wife's surgery.Personally, I believe that Real Estate Investing is secondary to my personal financial situation. I keep about $10,000 in cash, plus high credit balances to ensure that I am covered in all emergencies. The risk you face here is that you have a second emergency and have to pay another, incremental $10,000 to $20,000 bill come up in the short term.If it were me, I'd use whatever cash that I had saved to pay off as much of the bill as possible, and then arrange something with the hospital to pay off the bill with a payment plan using earned income. Are you sure that this can't be worked out in such a way as to not ding your credit? It seems to me that if you believe you are able to get a mortgage for an investment property, you will likely be able to get financing on similar or better terms for the payment of this medical bill as well.I think life happens like this, and that your next deal will likely be pushed back 6 months to a year, depending on your income and savings rate, because of this misfortune.

Joshua Chen · Answer

Sorry about your situation. I don't know if this will work, but.. you could consider explaining to the hospital the difficult position you're in? They might be understanding about it

Daniel Mohnkern · Answer

Thanks a lot for your advice, guys. I appreciate the time you took to answer my questions. I think I'm going to go ahead and organise a payment schedule and stick to it. If that isn't good enough and they cause problems with my credit, I'll then negotiate a discounted payment in return for deletion off my reports. At that time, if necessary, I'll go the HELOC route to make it happen. As an encouragement, I have a seller financed deal on a duplex in the works right now that I am almost certain is going to work out. So, even if credit gets dinged, there are still options! Thanks again for all the responses.

Adam Hershman · Answer

Hey Daniel,Two things. First, there is a very large change coming on how medical bills are reported and what negative impact those bills have on your credit, changes take place Nov 15th of this year I believe. While this doesn't help in the short term I think most people in your situation are frustrated by what an out sized impact and PITA factor associated with medical bills, so hopefully this provides some solace. Secondly, I think your best option is to make the payments to the hospital. It preserves your credit, and if they do ever sell it to a debt servicer/collector/factoring co, you can offer them a smaller lump sum (they are usually much more amiable to this option than original creditors) or if you get behind, most collection companies accept pay for delete requests, whereby you negotiate an amount to settle the account and they in turn delete any record of your payments made or otherwise. It is a great tool for those who are looking to clean up their credit, so it wouldnt surprise me if you had heard of this before.Adam

Daniel Mohnkern · Answer

Ok. I have heard from others that they made payment arrangements with a hospital but the hospital just sent it to a factoring company so they would get a chunk of money all at once instead of the effective 0% interest loan they would be giving the patient. Perhaps the others left out something essential like a missed payment or something. I just want to make sure I go about it in the wisest way possible so as to keep my excellent credit rating. An ounce of prevention is better than a pound of cure, right?

Richard C. · Answer

I don't know why you would assume that if you make a payment arrangement with the hospital, that they will nonetheless sell your debt and ding your credit.I've been fortunate enough not to run into it, but my understanding of how it works at our local hospital is that as long as you are current on a payment arrangement, they will not send your bill on to collections.