Ban Medical Debt from Credit Reports and Give Consumers a Fresh Start

Medical debt can be a crushing burden for many Americans, with one in five adults having to take on debt to pay for medical expenses. This debt can have long-lasting effects on credit scores.

According to a study, 64% of medical debt is due to unexpected expenses, such as emergency room visits or hospitalizations. This is often due to a lack of health insurance or high deductibles.

Medical debt can also lead to a vicious cycle of debt, with patients struggling to pay off their medical bills and then falling behind on other debts, including credit card bills. This can further damage their credit score, making it harder to get loans or credit in the future.

The good news is that there are steps being taken to address this issue, including efforts to ban medical debt from credit reports.

The CFPB is taking action to address the issue of medical debt on credit reports. The agency has proposed a rule to amend Regulation V, which implements the Fair Credit Reporting Act (FCRA), as to medical information and debt.

This proposed rule follows a report on medical billing and collection practices authored by the CFPB, which found that roughly 43 million people have medical bills on their credit report with a total outstanding amount of around $88 billion.

The CFPB is concerned that the credit reporting system is being used as a tool to coerce people into paying medical bills they may not even owe. Director Chopra noted that the CFPB would be taking steps to address this issue.

The proposed rule has three main components, one of which is to eliminate the special medical debt exception in Regulation V. This would remove the exception that broadly permits lenders to obtain and use information about medical debt to make credit eligibility determinations.

Lenders would still be able to consider medical information related to disability income and similar benefits, as well as medical information relevant to the purpose of the loan, if certain conditions are met.

Credit reporting agencies would be prohibited from including medical debt on credit reports if they have reason to believe that the creditor intends to use the medical debt information in violation of the proposed rule.

The three nationwide credit reporting conglomerates - Equifax, Experian, and TransUnion - have already voluntarily stopped reporting some medical bills on credit reports. However, the proposed rule would require them to stop reporting medical bills entirely.

The proposed rule would also prohibit lenders from taking medical devices as collateral for a loan and from repossessing medical devices like wheelchairs or prosthetic limbs if people are unable to repay the loan.

Comments on the proposed rule must be received by August 12, 2024.

In some states, medical debt is exempt from being reported on credit reports, but it's not a blanket exemption. California and New York are two states that have laws protecting consumers from medical debt on their credit reports.

California's law, enacted in 2019, prohibits creditors from reporting medical debt to credit bureaus. This means that Californians can't have their medical debt negatively impacting their credit scores.

Some states, like New York, have laws that allow consumers to request that medical debt be removed from their credit reports. In New York, consumers can submit a request to the credit bureaus to have their medical debt removed.

Other states, like Oregon and Washington, have laws that require creditors to provide written notice before reporting medical debt to credit bureaus. This gives consumers a chance to dispute the debt before it's reported.

California's law also requires creditors to provide written notice to consumers before reporting medical debt to credit bureaus.