What Is the Medical Debt Relief Act?
Key takeaways:
The Medical Debt Relief Act is federal legislation that aims to help consumers pay off and manage medical debt.
The act proposes extending the waiting period for including medical debt on a credit report to 1 year and removing paid or settled medical debt from consumer credit reports.
While the proposal is with a congressional committee and has yet to be signed into law, it represents a step forward on the path to affordable healthcare in the U.S.
The Medical Debt Relief Act (also known as the “Med Debt Act”) is federal legislation, which was introduced in early 2021, that aims to give consumers more rights when paying off medical debt. It would modify the rules that dictate what types of debt can be reported on a person’s consumer credit report — information that affects their credit score.
If passed, the Med Debt Act would prohibit the reporting of medical debt that has been paid off or settled or is less than a year old. In this article, we’ll explore what happens when a person isn’t able to pay their medical debt, along with some recent laws that seek to help people manage debt.
The burden of medical debt
Medical debt can be a crippling burden for people living in the U.S. Even with health insurance, the out-of-pocket costs for simple procedures can easily add up to thousands of dollars, leaving many people the impossible task of paying and juggling debt.
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A recent study published by the U.S. Census Bureau found that 19% of American households carry medical debt, owing an average of $2,000 per household.
In the study, the share of U.S. households carrying debt varied according to factors such as race and zip code. Along racial lines, Black and Hispanic households were most likely to have debt. And, in terms of family composition, households with children under 18 were most likely to have debt.
Interestingly, the agency also tracked what it called “high medical debt,” defined as debt exceeding 20% of the total household income. According to its figures, 11.3% of families with income below the federal poverty line carry high medical debt, while only 3% of households above the poverty line do the same.
For people without the means to pay or settle their medical bills, bankruptcy can sometimes be the only option. A study published in 2009 found that 62.1% of bankruptcies stem from medical debt issues. The study defined “medically bankrupt” debtors as people who cited illness or medical bills as their motivation or who had mortgaged their home to pay medical bills, reported medical bills totaling more than $1,000 in the past 2 years, or lost at least 2 weeks of work due to medical issues.
While more recent studies contest the 62.1% figure, it’s widely accepted that unexpected medical bills can throw a family who is living paycheck to paycheck into a vicious cycle of debt.
What happens if a person can’t pay their medical bills?
In general, if someone has debt, they are required to pay it off. If not, their personal data, payment history, and information on the amount owed can be sent to a collection agency. These businesses specialize in collecting and settling outstanding debt. They are known for being forceful and persistent in their demands for payment, so much so that, in 1977, the Fair Debt Collection Practices Act (FDCPA) was enacted to limit the circumstances under which collection calls can be made.
Under the FDCPA, debt collectors must follow these guidelines:
They may only contact an individual during certain hours, typically between 9AM to 8PM each day.
They may not contact them at work or their place of business.
They may not harass them or their family members about the debt.
They may not contact the debtor directly if he or she is being represented by legal counsel, provided that the collector knows or could easily know about the representation.
If they aren’t able to collect the debt, collection agencies will submit information on an account to a credit reporting agency, where it will be added to an individual’s report.
Hospitals and other healthcare systems are reluctant to report outstanding medical debt to credit reporting agencies. As such, they are always willing to work with patients to develop a realistic payment plan. (In some cases, the healthcare system may even be willing to accept less than the total amount owed, if the person complies with the payment schedule.)
How does medical debt affect credit?
When an outstanding medical debt is reported to a credit reporting agency, the information is added to an individual’s report and factored into their credit score. Even a single claim of outstanding debt can lower a person’s credit score anywhere from 50 to 100 points.
Fortunately, the Medical Debt Relief Act of 2016 added additional consumer protections around the processing of medical debt. Under the 2016 act, each of the three credit reporting agencies (Equifax, Experian, and TransUnion) must wait at least 180 days before adding medical debt to an individual’s report, in order to provide additional time for the debt to be settled and/or paid off in full. In addition, while other types of debt remain on an individual’s report for a full 7 years regardless of payment status, medical debt is removed if it’s been paid off or otherwise settled.
The new Medical Debt Relief Act
The new Medical Debt Relief Act is a proposed expansion of the 2016 legislation and an amendment to the Fair Credit Reporting Act. It would give consumers additional protections around the reporting and processing of medical debt by extending the waiting period for including medical debt on a credit report to 1 year and by continuing the removal of paid-off or settled medical debt from consumer reports. The act, which was introduced in Congress by Democratic Rep. Katie Porter of California, currently sits before the House Committee on Financial Services.
To be signed into law, the bill must be passed by the House committee, move to the Senate, be passed by the assigned Senate committee, and then, finally, win votes in the House and Senate. While that may seem daunting, it is standard protocol for all legislation and can be a fluid process. If a bill is not passed during the session in which it is introduced, it can always be revived the following year.
The bottom line
The Medical Debt Relief Act of 2016 introduced some consumer protections around medical debt management by requiring credit reporting agencies to wait 180 days before hurting a consumer’s credit, and by removing paid or settled medical debt from consumer reports. The Medical Debt Relief Act of 2021 would bolster these protections by expanding the waiting period to a full year, buying people more time to settle, negotiate, or otherwise pay off their medical debts.
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