The high cost of health insurance coverage and medical care in the U.S. continues to cause financial difficulties for Americans across age groups. According to a recent study published by the Journal of General Internal Medicine, in 2019 alone around 137.1 million adults reported financial hardship related to medical expenses.
A related study also found that medical expenses are a factor in around 66.5% of American bankruptcies, and healthcare costs are one of the top reasons that people consider cashing in retirement savings early.
Medical bills and financial instability
Even those with a generous health insurance policy, minimal previous debt and a frugal lifestyle may find themselves struggling to manage mounting medical bills.
A sudden or severe injury or illness may result in loss of employment, including both loss of income and loss of insurance coverage. Even with coverage, out-of-pocket expenses may range from basic costs related to transportation or childcare to specialized treatments, out-of-network care or procedures not included in a policy.
The risk of tapping retirement funds
Individuals who have invested in a 401(k) account or other retirement fund may find it tempting to cash in benefits early to discharge medical bills. However, those who do so before the age of 59 ½ may face a 10% penalty for withdrawing early. Worse, tapping a retirement account prematurely may leave individuals financially vulnerable once they do retire.
Why filing for bankruptcy may be a better option
Many retirement accounts are safe from creditors when filing for either Chapter 7 or Chapter 13 personal bankruptcy, including qualified 401(k)s, 403(b)s, IRAs and other profit-sharing plans.
Filing for bankruptcy may allow individuals to keep and grow their retirement funds, as well as certain other assets, while discharging medical and other debt.