Collecting Medical Debt Through South Carolina’s Setoff Debt Collection Program: How It Works and Why It Doesn’t

South Carolina has one of the highest rates of past-due medical debt, which is a leading cause of bankruptcy for many South Carolinians. Delinquent medical debt is especially common among southern states due to their higher numbers of uninsured individuals and lower household incomes. One aspect that varies within the southern region, however, is how state governments deal with unpaid medical debt.

South Carolina allows creditors to collect medical debt, along with certain other forms of debt, by garnishing state income tax refunds. South Carolina authorizes this tax refund reduction predominantly through its Setoff Debt Collection Program (SDCP). Under the program, qualifying creditors may submit claims of unpaid debt to the South Carolina Department of Revenue (SCDOR). SCDOR then processes the claims, identifies the debtors, and garnishes the debtors’ tax refunds on behalf of their creditors. Alternatively, qualifying creditors can file claims through the South Carolina Association of Counties (SCAC) or the Municipal Association of South Carolina (MASC). These two associations act as clearinghouse entities that process and send claims to SCDOR on creditors’ behalf.

While SDCP seems to be an adequate method for the state’s collection of unpaid debts, it suffers from two major pitfalls: lack of transparency and lack of consumer protections. Specifically, although hospitals use SDCP to collect unpaid medical debts, it is unclear how those hospitals qualify for participation and why many choose to collect through SCAC rather than SCDOR. The lack of public information and disclosure regarding SCAC’s involvement exasperates the issue. Further, although South Carolina has been referred to as a consumer-friendly state, SDCP does little to adequately protect individuals with past-due medical debts. SDCP’s lack of transparency and consumer protections often go hand in hand because, although it is extremely difficult for taxpayers to access information on the program, they are nonetheless subject to tax refund garnishment with few, if any, options for recourse.