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The Biden administration is planning to eliminate medical debt from credit reports of millions of Americans. What could this mean for you?

The Biden administration Tuesday announced a new proposed rule to erase medical debt from credit reports, potentially helping an estimated 100 million Americans who struggle to pay their medical bills. The new rule, which was proposed by the Consumer Financial Protection Bureau (CFPB), aims to bring relief to patients who have had trouble getting approved for loans, renting an apartment, getting a job and being able to afford everyday essentials due to medical debt. The CFPB is a government agency whose goal is to make financial markets fair for Americans.

“The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe,” CFPB Director Rohit Chopra said in a press release. “Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans.”

Here’s what the new proposal might mean for you and your wallet.

⚕️What’s happening?

The bureau’s anticipated proposal advances an initiative by Experian, Equifax and TransUnion in 2022. The consumer reporting agencies removed medical debt that went into collections from credit reports once it had been paid off and eliminated medical debt balances under $500. The new rule wipes away medical debt from all credit reporting in the U.S. for the remaining 15 million Americans with an outstanding $49 billion of medical debt in collections.

Under the new proposal:

  • Consumer reporting companies like Experian, Equifax and TransUnion would be banned from including medical debts and collection information on credit reports. Creditors use that information to make underwriting decisions — a crucial practice in the mortgage process that weighs whether a person gets approved for a loan.

  • Lenders would be banned from repossessing medical devices as collateral for a loan and if people are unable to repay the loan.

  • Debt collectors would be prohibited from coercing payments for inaccurate or false medical bills, an issue that many Americans have complained about to the CFPB. Inaccurate medical bills are often the subject of disputes between patients and billing departments that can last for years.

The CFPB, the Treasury Department and the Department of Health and Human Services have requested public comment to try to gain an understanding of the “medical credit cards, loans, and other financial products used to pay for health care” and the effects the products may have on patients and the health care system. The rule, if finalized, would probably not take effect until 2025.

Vice President Kamala Harris also called on cities, states and hospitals to forgive debt during Tuesday’s press call to announce the actions.

🏥 What could this mean for you?

Millions of Americans who have medical debt in collections, which hurts credit scores, could get a score boost of an average of 20 points under the new plan when the debt gets wiped away.

Medical debt is the largest source of debt in collections, according to the White House, representing more than auto loans, credit cards and utility bills combined. This type of debt disproportionately affects Black and Hispanic people as well as people living in the South. An estimated 11 million Americans had $2,000 in such debt and 3 million Americans held medical debt of over $10,000.

The CFPB also found that the appearance of medical debt on a credit report can create an inaccurate prediction of whether a person will repay other types of debt. This can create barriers to accessing car, home or small business loans or may make such loans available only with high interest rates.

Under the new rule, the CFPB predicts that every year, 22,000 more Americans will get approved for mortgages, which ultimately benefits lenders, allowing them to approve more people for loans.

The new rule could also provide relief for about 63% of households with medical debt who have had to reduce their spending on basic needs like food and clothing as they try to pay the debt down. About 48% of them have also had to dip into their savings, according to research by the Kaiser Family Foundation.

Additionally, many Americans have struggled to save for retirement or higher education due to medical debt, the Kaiser Family Foundation found.

👎 Are there any downsides to this plan?

Some hospitals and medical providers have warned that the Biden administration’s proposal could encourage doctors to request payments up front before providing care. Some have also suggested the plan’s looser credit requirements could make it easier for people to take on debt that they can’t handle, according to NPR.

“It is unfortunate that the CFPB and the White House are not considering the host of consequences that will result if medical providers are singled out in their billing, compared to other professions or industries,” Scott Purcell, CEO of ACA International, the collection industry’s leading trade association, told NPR.

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