Could Medical Debts be Removed from Credit Reports?

As healthcare costs continue to rise, even those with insurance find themselves struggling to pay off large medical bills that can unexpectedly accumulate from surgeries, emergency visits, or chronic illness treatments. According to the Consumer Financial Protection Bureau (CFPB), approximately 15 million Americans have a combined medical debt of around $49 billion. Typically, medical debt is not reported to credit bureaus as long as it remains with your healthcare provider. However, if you don't pay the bill for at least three months, your provider may sell it to a collections agency; that's when it can impact your credit score. Unpaid medical debt that is in collections can be reported to credit bureaus after one year. At that point, it remains on your credit report for seven years - the same as any other kind of debt. It is estimated that 20% of credit reports contain medical debt.

A new proposal by the Biden administration would protect Americans from having their credit history cratered by medical bills. The possible rule change, announced by the CFPB earlier this month, would remove medical bills from credit reports and prevent lenders from making decisions based on medical information. In their statement, the CFPB said that medical bills "have little to no predictive value when it comes to repaying other loans." In addition, medical bills can also be confusing and error-prone, with patients frequently billed incorrectly due to the complex nature of insurance billing and healthcare coding. It can take a long time for billing errors to be resolved. The proposed rule also would prevent lenders from repossessing medical devices like wheelchairs if people cannot repay a loan.

Even if the proposed rule is enacted and the debts would not appear on credit scores, patients will still owe them. That means that hospitals, physicians, and other providers could still use other collection tactics to try to get patients to pay, including using the courts. Some patient advocates are concerned that if this new rule takes effect, providers will start to require payment before starting any medical treatment or procedure.

Even if the rule is approved, it's not expected to take effect before 2025. The CFPB's proposed rule to remove medical debt from credit reports represents a significant shift in recognizing the unique nature of medical debt and its undue impact on American consumers. With this change, the CFPB hopes to alleviate the burden on consumers and acknowledge that medical debt is not a reliable indicator of credit risk. While this change promises several benefits for individuals - particularly those who are financially vulnerable - it also requires careful implementation to ensure that the removal does not inadvertently obscure genuine credit risks.