California bans medical debt from credit reports

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Californians burdened by medical debt will no longer face the anxiety of unpaid bills affecting their credit reports, thanks to legislation signed by Governor Gavin Newsom on Tuesday. This move places California among several states working to shield consumers from the pressures of unaffordable medical expenses.

The bill, introduced by Senator Monique Limón (D-Santa Barbara) and supported by Attorney General Rob Bonta, prohibits healthcare providers and collection agencies from reporting patients' medical debt to credit reporting agencies. In the past two years, at least eight other states have enacted similar bans. The Biden administration has also proposed federal protections, though their implementation timeline remains uncertain.

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Chi Chi Wu, a senior attorney at the National Consumer Law Center, emphasized the need for such laws, stating, “Nobody chooses to get sick, and then your credit gets ruined. States must continue to adopt protections in case federal measures falter.”

Starting in January, California’s law will not only cover standard credit reports but also those used for employment and tenant screenings. This is in addition to proposed federal measures aimed at preventing credit agencies from reporting medical debt.

Lawmakers in California argue that medical debt does not accurately reflect a person's creditworthiness and can severely impact individuals' ability to secure jobs, rent homes, or obtain loans.

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However, the new law does have a notable exception: patients who utilize medical credit cards or specialty loans—often with high-interest rates—will not have their debts removed from credit reports, unlike protections offered in states like Colorado, Minnesota, and New York. This loophole was introduced through last-minute amendments, reflecting the influence of certain industry groups opposed to the legislation.

Kelly Parsons-O’Brien, legislative chair of the California Association of Collectors, explained that these exemptions are necessary since medical credit cards can be used for non-medical purchases, complicating how debts are classified.

Although major credit agencies like Equifax, Experian, and TransUnion have begun to limit the reporting of some medical debts, many individuals still face significant amounts on their credit reports. According to the Consumer Financial Protection Bureau, around 15 million Americans have medical debts recorded.

Approximately 40% of Californians report having some form of medical debt, with low-income, Black, and Latino communities disproportionately affected, as noted by the California Health Care Foundation.

In addition to this new legislation, Governor Newsom also signed a bill that prevents hospitals from placing liens on properties owned by low-income individuals, further strengthening consumer protections against medical debt.

A recent analysis indicated that credit reporting is a primary method hospitals use to compel payment from patients, and restrictions on this practice could hinder their ability to collect.

Sonia Hayden, a resident of Sacramento, shared her experience of a significant drop in her credit score due to a $200 emergency room bill from a past accident, despite her insurance covering most of the medical expenses. After struggling for over a year to rectify the error, she still sees the debt on her credit report, which impacted her ability to secure a home loan at favorable rates.

“Medical bills are not something people ask for,” Hayden remarked, highlighting the added stress of managing debt from traumatic experiences. “It shouldn’t affect your credit.”