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Suffer a sudden illness, hurt yourself in an accident, or have to quit your job to care for a family member, and you could end up in a risky financial position. Intensive care and therapy, specialized medical equipment, and doctor’s bills add up quickly.
Perhaps you responded by depleting your savings account and then turning to credit cards to afford healthcare services. Now assume you can’t repay your newly acquired medical debt, and creditors and collection agencies start hounding you. You may even face bankruptcy.
If this sounds familiar, you aren’t alone. The Commonwealth Fund Biennial Health Insurance Survey of 2010 found that nearly 44 million Americans were paying off medical debt in 2010, up from 37 million in 2005. The survey also found that 41 million Americans with medical bill problems or medical debt changed how they live in order to repay their bills. These changes included using up savings, not being able to pay for food, heat, or rent, incurring credit card debt, taking out a loan or mortgage against their home, or declaring bankruptcy.
So if you worked diligently to maintain a clean credit report in the past, these overdue medical bills reported to the credit bureaus could ruin your otherwise good credit and make it challenging – if not impossible – for you to obtain a new credit card, auto or student loan, or even a home mortgage.
New Bill Could Help Consumers with Paid-Off Medical Debts
Some legislators in Washington are hoping to change the way your medical debt is reported on your credit report.
In June 2011, U.S. Representative Heath Shuler and a few Congressional leaders introduced the Medical Debt Responsibility Act of 2011. The bill would force credit agencies to remove any medical debts listed on a consumer’s credit report that were once in collection (up to $2,500 per collection) but have since been paid off in full or otherwise settled (e.g., through a debt settlement plan). Credit agencies would have up to 45 days to remove these listings.
Currently, any accurate debt listed on a consumer’s credit report can stay there for up to seven years, even once it’s settled or paid in full. If this legislation is approved and paid-off medical debts are removed from credit reports, consumers’ credit scores would likely increase. This change could also make it easier for consumers to access credit and access it at a lower interest rate because these debts wouldn’t be included in decisions about in an individual’s credit-worthiness.
The legislation sets a $2,500 per collection amount to recognize the small, routine medical bills that cause big credit problems for consumers. This limit also recognizes that bills are sometimes sent by mistake, yet end up in collection even while health services representatives correct the paperwork. Of the approximately 44 million Americans under the age of 65 with medical debt or medical bills being paid off over time, one-third can be attributed to a billing error, according to a June 2, 2011 statement from Rep. Shuler’s office.
The legislation’s supporters also say that medical debt is not a good indicator of a person’s credit risk because it’s not a type of debt people willingly take on. This is in opposition to credit card debt resulting from careless shopping, for example.
Objections to Removing Debts
Despite these arguments, Congress may not approve Rep. Shuler’s bill.
Assuming these debts aren’t caused by billing errors, potential lenders and credit card companies want to see consumers’ payment histories to measure their likeliness of repaying debt. If historical information isn’t shown, how can those decisions be made? Additionally, if cleared medical debts are removed, a person could take on new credit they aren’t able to repay.
A committee of legislators in the U.S. House is currently reviewing The Medical Debt Responsibility Act of 2011. They will discuss and perhaps revise it before determining whether to send it to the U.S. Senate or House for further consideration. Track the status of Rep. Shuler’s bill here.
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