Biden administration moves to remove medical debt from consumers' credit reports - but not from their wallets

Andrew Keshner

A new rule would remove $49 billion in medical debt from credit reports

Unpaid medical bills will be wiped off credit reports under a proposed rule that's a win for people trying to salvage their finances after health emergencies, the Biden administration said Tuesday.

Though the three major credit-reporting agencies already took the majority of medical debt off of Americans' credit reports, the newly proposed rule from the Consumer Financial Protection Bureau would blot out most of the remaining medical debts that appear.

If finalized, the CFPB rule would remove up to $49 billion in medical debts from the records of 15 million Americans, according to the agency's estimates. Pulling the debts from the credit reports would boost credit scores by an average of 20 points, the consumer watchdog agency added.

But the underlying debts will still exist. Americans may have amassed at least $220 billion in medical debt though the end of 2021, according to KFF and the Peterson Center on Healthcare.

In other words, Tuesday's proposed rule doesn't forgive the $49 billion in debt appearing on records. These debts would instead be shielded from lenders if a person was looking for a car loan, a mortgage, a business loan or some other form of credit.

That's still an important step, according to the Biden administration.

"No one should be denied access to economic opportunity simply because they experienced a medical emergency," Vice President Kamala Harris said Tuesday.

Medical debts often contain inaccuracies, and debt collectors may be working with bad information, said CFPB Director Rohit Chopra. Too often, the result is "people give up and pay a bill they don't actually owe just to get a peace of mind and move on with their life," he said.

It could be early 2025 before the rule is finalized, according to a senior Biden administration official. The rule would apply to unpaid dental debts in addition to medical debts, the official noted.

Americans would be able to land another 22,000 mortgages each year with the debts removed from reports, according to administration estimates about how credit scores could improve as a result.

The rule contains exceptions where lenders would be allowed to use medical debt in decisions about creditworthiness, like when considering an applicant's disability income in a potential loan.

The Consumer Data Industry Association, a trade association with major credit-reporting companies Equifax (EFX), TransUnion (TRU) and Experian (EXPGY) as members, said it was reviewing the proposed rule.

"The Nationwide Consumer Reporting Agencies understand the important role we play in the financial lives of Americans, and we remain committed to helping facilitate fair and affordable access to credit for all consumers," the organization said.

Consumer groups cheered the CFPB's announcement.

"These newly proposed rules are an important step toward implementing a fair credit system that doesn't penalize people for life events they can't control, such as getting sick or injured," said Patricia Kelmar, healthcare campaigns director at U.S. PIRG.

Medical debt continues to plague Americans' finances. In the latest edition of a Federal Reserve study on consumers' finances, 17% of people said they were on the hook for their unpaid medical debts or that of a family member.

One in five people told Fed researchers they had to pay unplanned medical expenses in the past 12 months and the median amount was between $1,000 and almost $2,000.

There are a handful of states, cities and counties spending money to pay off residents' medical debts, including New York City. These places are using $7 billion of their unspent money from a $1.9 trillion COVID-19 relief package in 2021 to pay off people's medical debt, the White House said Tuesday.

The announcement comes at a time when the Biden administration has also been trying to forgive federal student-loan debt.

Medical debt should be the real priority, according to a Tuesday poll from UChicago Harris/AP-NORC. Though 51% of people said it's extremely or very important to forgive medical debt, 39% felt the same way about student-loan forgiveness.

How has medical debt impacted your life? We want to hear from readers. If you'd like to share your experience, write to readerstories@marketwatch.com. Please include your name and the best way to reach you. A reporter may be in touch.

-Andrew Keshner

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06-11-24 2022ET

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