Benjamin Ashford|Biden administration to bar medical debt from credit reports

Gov. Pritzker wants to eliminate medical debt for 1M in Illinois

Medical debt will be stricken from credit reports in a change proposed by the White House that could help millions of Americans land a job, rent a home or obtain a car loan.

Vice President Kamala Harris and Rohit Chopra, director of the Consumer Financial Protection Bureau, formally announced the proposal to take unpaid medical bills off the table in determining one's credit worthiness in a news conference on Tuesday.

The idea is to no longer "unjustly punish people for getting sick," Chopra said. He noted the potential financial damage caused by one trip to a hospital emergency room, a debt "taken on unexpectedly and in a time of crisis."

Further, CFPB researchers have found that medical debt, unlike other kinds of debt, does not accurately predict a consumer's creditworthiness, rendering it virtually useless on a credit report. 

Even so, medical debt results in thousands of denied applications on mortgages that consumers would repay, the agency said. The CFPB expects the proposed rule would lead to the approval of approximately 22,000 additional, safe mortgages each year, it stated.

The Biden administration signaled its intentions in September to craft the measure, among the more significant federal actions taken to address medical debt. 

The three largest credit agencies — Equifax, Experian, and TransUnion — stopped including some medical debt on credit reports as of last year. Excluded medical debt included paid-off bills and those less than $500.

But the agencies' voluntary actions left out millions of patients with bigger medical bills on their credit reports. 

About 15 million Americans have more than $49 billion in outstanding medical bills in collections, according to findings released by the CFPB in April. 

Letting debt pile up due to often unplanned health care needs is a problem shared by many, forcing some to take on extra work, relinquish homes and ration food and other basic necessities, a KFF Health News-NPR investigation found.

Credit reporting, a threat designed to compel patients to pay their bills, is the most common collection tactic used by hospitals, according to a KFF Health News analysis.

• Without Medicare Part B's shield, patient's family owes $81,000 for a single air-ambulance flight
• He fell ill on a cruise. Before he boarded the rescue boat, they handed him the bill 

"Negative credit reporting is one of the biggest pain points for patients with medical debt," said Chi Chi Wu, a senior attorney at the National Consumer Law Center. "When we hear from consumers about medical debt, they often talk about the devastating consequences that bad credit from medical debts has had on their financial lives."

Although a single black mark on a credit score may not have a huge effect for some people, it can be devastating for those with large unpaid medical bills. There is growing evidence, for example, that credit scores depressed by medical debt can threaten people's access to housing and fuel homelessness in many communities.

The rules announced on Tuesday would bar credit-reporting agencies from factoring in medical debt in calculating credit scores. Lenders will no longer be allowed to use medical debt to determine if someone is eligible for a loan.

The proposal will be subject to weeks of public comment and if passed would likely not take effect until 2025, after the presidential election in November — the outcome of which could derail the rule entirely.

"We expect that Americans with medical debt on their credit reports will see their credit scores rise by 20 points, on average, if today's proposed rule is finalized," the CFPB said in a statement Tuesday.

Kate Gibson

Kate Gibson is a reporter for CBS MoneyWatch in New York, where she covers business and consumer finance.