MW Medical debt may not hurt your credit score, a new rule says. What happens if you don't pay the bill?

Andrew Keshner

The rule should be blocked, credit-reporting industry groups say in new lawsuit

Unpaid medical debt will no longer affect credit scores, according to a new rule from Biden administration regulators who want to mitigate the financial repercussions of those bills.

So if pending medical debt doesn't factor into a credit score, how far can people go when staring down a stack of doctors' bills? Can they simply not pay them?

Credit-reporting trade groups are already suing to block the rule, so its future is uncertain.

"This is not a free pass for people to not pay the bills that they owe," said Patricia Kelmar, senior director of healthcare campaigns at U.S. PIRG, a consumer-advocacy group. Still, she said, "it gives them a little more peace of mind and it gives them a little more leverage with the debt collectors."

The Consumer Financial Protection Bureau's rule will not abolish a person's medical debt, but it will block those outstanding sums from being seen by lenders who want to know about a person's creditworthiness.

The agency unveiled the finalized regulation on Tuesday. A consumer credit-reporting trade association and a credit union group sued in Texas federal court on Wednesday to block the rule that, it says, exceeds the CFPB's regulatory powers.

Missed mortgage payments and late auto-loan bills can appear on a person's credit report, sinking a score. Missed credit-card payments and, soon enough, federal student-loan payments can also dent a score. When consumers want financing, or possibly a new job or apartment, a lower score from a spotty credit history may come back to haunt them.

Medical debt ought to be a different case because credit-score blemishes connected to health scares and unforeseen medical mishaps aren't a good gauge of a person's ability to repay other loans, CFPB officials and consumer advocates say.

Approximately 20 million Americans have at least a collective $220 billion in medical debt, by one count. Affected consumers could see their credit scores jump an average 20 points higher, the announcement noted.

The new rule is a parting shot from the Biden administration at the sting of hefty medical bills during a time when healthcare costs and insurance coverage are under the microscope.

The CFPB rule is the latest example of an ongoing trend where less medical debt is affecting people's credit scores, said Allison Sesso, president and chief executive of Undue Medical Debt, a nonprofit that buys and pays off consumer medical debt.

"Many of our hospital partners, from whom we acquire medical debt to erase, never report to credit agencies," Sesso noted. The rule closes the book "on medical debt as a necessary element of a person's credit report."

So does it give patients more negotiating power with bill collectors? "It gives patients more breathing room to focus on their health and not worry about how an accident or chronic illness might ruin their finances or how a debt will create a mental health burden," she said.

In 2022, Equifax $(EFX)$, TransUnion $(TRU.UK)$ and Experian (EXPGY) announced they would stop reporting medical debt under $500.

After the CFPB unveiled its rule, an Equifax spokesperson said the debt does help paint a consumer's complete debt picture for lenders - even with the understanding that this type of debt "is generally not taken on voluntarily."

The new rule could end with "unintended consequences" that crimp credit access and make it more expensive, the spokesperson added. "We believe that the root of the problem is with the healthcare system - not the credit-reporting system."

The debt is still there - but a 'threat' may be gone

Patients already have the power to negotiate a bill size and its payment terms - and they should be willing to use it, Kelmar said. The rule doesn't end the possibility that debt collectors could contact a patient about unpaid bills, and it doesn't prohibit them from filing lawsuits to collect on medical debt, the CFPB acknowledges . But it eliminates a common tactic that debt collectors use, Kelmar said.

For patients, "it's strengthening their position by removing what was the most scary threat a debt collector could say to them, which is, 'If you don't pay this, your credit score is going in the tank.' That wouldn't have an impact any more."

There's evidence that self-advocacy helps people burdened by medical debt. One in five people said they received medical bills they either could not afford or did not agree with, according to University of Southern California researchers.

When they called their provider, more than a quarter of the people said they got the bill corrected. Price cuts, payment plans, financial help and outright bill cancellation were other outcomes, said the JAMA Health Forum study.

Consumers who want to avoid having medical debt weigh them down financially should be mindful of what payment method they use for those bills, Sesso and Kelmar noted. "Never put medical debt on credit as it then becomes financial debt and loses certain protections," Sesso said. Even if a credit card is advertised as a way to pay back medical expenses, owed amounts will show on a credit report, Kelmar noted.

Patients should also be aware of state and local rules on what lenders can do with medical debt.

A handful of states, including California, Illinois and Rhode Island, bar consumer-credit reporting of medical debt. Some states, cities and counties are also spending millions to pay off residents' medical debts.

The new medical-debt rule is final, but there could be more to the story

The rule is scheduled to take effect on March 17, but industry concerns have quickly welled up - and they say consumers should care too.

The Consumer Data Industry Association is one of the organizations suing to stop the rule. Dan Smith, the group's president and CEO, said "the CFPB lacks the legal authority to prohibit creditors from considering medical debt, as long as information about the provider of medical services or the nature of services provided is not disclosed."

The agency can't just "dictate what can or cannot be included on consumer credit reports," he added.

There's also the potential practical effects of the rule to consider, Smith told MarketWatch on Tuesday. The CFPB rule may force debt collectors to file more lawsuits to get the money from patients, he said. It may also make healthcare providers demand their payments upfront, Smith added.

Within the 345-page rule, CFPB regulators said they expected any increase in debt-collection frequency "would be limited." The CFPB declined to comment on the lawsuit challenging the rule.

The lawsuit has no impact on consumers for now, Kelmar said. "Nothing about filing a suit will change the implementation of the rule until the case goes through the process. That can take months or more."

Unpaid bills harm the market for doctors, medical services and raise the question of what procedures can be done without full payment ahead of time, said Scott Purell, CEO of ACA International, an organization representing debt-collection firms, creditors and asset-buying companies.

"Medical debt is a serious challenge for many Americans, but the CFPB's final rule will do nothing to address the underlying issues," Purell said. "Instead, the rule will suppress accurate information and reduce access to credit and important healthcare services while putting lenders and medical providers at risk."

By then, Donald Trump will be president and Kelmar said he could rescind the rule if he wanted. During his first term, Trump signed the "No Surprises Act," which prevented people from getting shocked with massive out-of-network bills during emergency room visits.

Costs - including medical bills - weighed heavily on the minds of many Americans who voted for Trump, Kelmar said. "I would think the president-elect would think it's a good thing and stand behind it."

The Trump transition team did not respond to a request for comment.

-Andrew Keshner

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January 08, 2025 15:55 ET (20:55 GMT)

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