Medical Debt May Soon Be Wiped From Your Credit Report...

Photo Illustration by Joules Garcia for Verywell Health; Getty Images

Fact checked by Nick BlackmerFact checked by Nick Blackmer Key TakeawaysThe federal government announced a proposal to remove medical debt from current and future credit reports.The government said the move would crack down on predatory debt-collection practices that leverage credit scores to coerce people into making payments, even when their medical bills are inaccurate.Doing so would increase credit scores by an estimated average of 20 points for 15 million Americans and lead to the approval of 22,000 more mortgages.
The Consumer Financial Protection Bureau (CFPB) last week proposed a rule that would stop credit reporting agencies from including medical debt on credit reports. The rule could make it easier for some 15 million Americans to apply for home loans, car loans, and small business loans.If the rule is finalized, it will improve credit scores by an average of 20 points, according to the CFPB. That would lead to an estimated 22,000 more people being approved for a mortgage and able to buy a home.The new rule would stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical information. It applies to anyone who currently has medical debt that affects their credit scores and stops it from being factored into credit reports in the future. That includes dental care.Many medical bills are inaccurate, according to Rohit Chopra, MBA, director of the CFPB. The rule could stop credit scores from being penalized for medical debts they don’t even owe.“This rule would stop debt collectors from using the credit report as a cudgel to coerce consumers into paying bills they may not even owe, and make sure the credit reporting system doesn’t unjustly punish people for getting sick,” Chopra said in a press call.The government will accept public comments on the proposed rule until mid-August, and the rule is expected to be finalized early next year.
Related: Could Medical Debt Be Forgiven Like Student Loan Debt?
An Important Step in Easing the Burden of Medical DebtMedical debt is a huge contributor to credit report penalties. Nearly 60% of bills that are in collections and appear in people’s credit records are medical bills. And while it’s true that medical debt is an issue for people who are uninsured or underinsured, the majority of people who carry medical debt do have health insurance.“It’s very different than other forms of debt. No one plans to have a medical emergency, and everyone needs essential health care. All of a sudden, they’re saddled with medical debt,” said Mona Shah, JD, MPH, Senior Director of Policy and Strategy at Community Catalyst, a non-profit that works to improve race equity and health justice in the health system.“There is a direct impact on health because people might be scared or nervous to seek out health care because they’re worried about the fact that if they end up with more medical debt, it’ll just hurt their credit scores and credit ratings even further,” Shah added.Improvements in people’s credit scores could also lead to downstream health benefits, like the ability to buy a car to make it easier to access medical care or improved housing security. Decades of research shows that stable housing is a key determinant of someone’s health. For some people, a credit score weighed down by medical debt could prevent them from being approved for an apartment or mortgage. People Have Tried—and Failed—To Fix This Problem BeforeIn 2022, the three credit reporting conglomerates—Equifax, Experian, and TransUnion—announced they would remove some medical bills from credit reports. Even after those changes, however, the CFPB said there is $49 billion worth of medical debt factored into Americans’ credit reports.
Patients Are Being Penalized for Incorrect Medical DebtsThe CFPB report showed that most medical bills factored into credit reports are inaccurate. Some people are incorrectly charged for care they never received, while others are billed for care that insurance should have covered.Sometimes, even when insurers adjust a person’s incorrect medical bill, those changes aren’t always relayed to debt collectors. A federal law keeps debt collectors from directly accessing people’s medical bills, so they have no way of verifying if their reports are correct.The proposed rule intends to crack down on “predatory actors” who know that the inclusion of medical debt in a credit report can be an effective way to damage someone’s credit report and “unjustly coerce payments from consumers,” Chopra said.“Many of us have been ensnared in that endless doom loop between insurance companies and hospitals and others when it comes to an incorrect medical bill,” Chopra said. “Oftentimes, people give up and pay a bill they don’t actually owe, just to get some peace of mind and to move on with their lives.”The rule also prohibits debt collectors from taking medical devices as collateral for a loan. Currently, lenders can repossess wheelchairs, prosthetic limbs, and other devices from people who are unable to repay their loans.Some opponents of the rule say that if people aren’t penalized through their credit score for unpaid medical bills, many may simply never pay their bills. But a 2014 report indicates that medical debt is less predictive of whether someone will repay a loan than other types of debt that appear on credit reports.The move could also buy people more time to validate that their medical bills are accurate before paying them off.Importantly, the rule does not cover medical debt carried on credit cards, including medical credit cards. That means that if someone paid off a hospital bill using a credit card, the debt from that card will continue to appear on their credit report.Next Steps for Addressing Medical DebtMost people impacted by poor credit scores tied to medical debt live in the South and in low-income neighborhoods. Communities of color who have experienced racism and classism throughout the years tend to carry the most medical debt.Easing the burden of medical debt on Americans requires addressing the root causes of debt accumulation, Shah said. That includes cracking down on billing errors and on charitable hospitals, which are required to notify people if they are eligible for financial assistance, but often don’t.During last week’s announcement, the White House also highlighted efforts to eliminate some medical debt. Under the American Rescue Plan, it has so far forgiven $650 million and plans to forgive another $7 billion, according to a White House spokesperson.Some organizations, like Undue Medical Debt, buy people’s medical debt for pennies on the dollar to help provide some relief. Local governments are contributing to this effort, too. Some cities and states are using their own funds to buy out residents’ medical debts, as well as funds from the federal government.Shah said that while her organization, Community Catalyst, is supportive of efforts to buy out medical debt, fixing the issue in the long term will require more intensive efforts to help people avoid going into debt at all.“Medical debt is very unique,” she said. “Most people need health care throughout their lives, but it’s also very unpredictable when you’re going to need additional health care. It’s very possible that someone’s medical debt could be relieved, and then a month later, they’re coming back in the same situation again.” What This Means For YouThe proposed rule may not be finalized until 2025. If the rule is approved, people with unpaid medical bills can check with credit reporting agencies to make sure that their credit score isn’t impacted by that debt. When you receive health care at a hospital or other facility, you can also ask about your provider’s financial assistance policies to see if you are eligible for charity care. Getting financial assistance upfront can minimize your medical debt later.
Read the original article on Verywell Health.

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