Unpaid medical debt can ruin your credit. A proposed remedy is in sight.

When Cheryl Montgomery awoke in the hospital after a medical emergency, the last thing on her mind was the billing headache that would follow.

Even with robust health insurance, Montgomery still owed $25,000 on half a dozen bills from an ambulance company, an out-of-network hospital, an anesthesiologist, a lab and various doctors. She hired a consumer advocate who negotiated the bills to a reduced amount, which she paid.

She assumed her medical financial crisis was over. Not even close, it turned out.

In January 2022, a year and a half after her hospitalization, a collection agency representing a doctor she couldn't recall ever meeting billed her $1,700. The collection agency pestered her with calls and letters and reported the debt to credit rating agencies that lowered her credit score the same month she was trying to lease a new vehicle.

"I was having a mini panic attack," said Montgomery, a Pennsylvania resident who lived at the time in a suburb of Salt Lake City. "I had gone through the stress of dealing with this already" before the unexpected collection notice arrived that January.

Montgomery's experience is an all-too-common scenario in a nation where 1 in 5 adults have some medical debt. Billing errors and disputes over insurance payments can compound problems for consumers and result in credit reporting agencies sharing inaccurate and often harmful information. Such reports not only damage a person's ability to borrow money for a car or home, but they also can scuttle job prospects, apartment rentals and utility hookups.

Medical bills are a common source of debt reported to the three national credit reporting companies: Equifax, Experian and TransUnion.

Medical bills accounted for 58% of debt collection on consumers' credit records, according to a report in 2022 from the Consumer Financial Protection Bureau. Medical collection appeared on more than 43 million credit reports for consumers, according to the agency.

After that 2022 report, the three largest credit reporting companies agreed to remove several forms of debt from credit reports: paid medical debts, unpaid medical debts less than a year old and medical debt less than $500.

Now the bureau wants to eliminate all medical debt from credit reports. The federal agency proposed the rule last June and collected extensive public comments. The agency is reviewing those comments and is working toward finalizing a rule that would take effect in 2025, a bureau spokesperson said.

Vice President Kamala Harris touted the bureau's proposal earlier this year and urged state and local governments to go even further. She called on local governments to use public dollars to purchase and eliminate debt and protect consumers from "coercive debt collection practices," according to a White House fact sheet.

Now, more than a week after former President Donald Trump defeated Harris in the presidential election, it's unclear what will happen with this proposal or what steps the new administration might take to protect consumers from medical debt. In an announcement Tuesday, Trump said allies Elon Musk and Vivek Ramaswamy would lead a new Department of Government Efficiency, which would seek to "slash excess regulations, cut wasteful expenditures and restructure federal agencies."

Protect patients from credit harms, advocates say

Consumer advocates say the Consumer Financial Protection Bureau rule would provide clear protection for patients.

Eliminating medical bills for credit reports is something patients desperately need, said Carrie Joy Grimes, founder and CEO of WorkMoney, a nonprofit consumer organization.

"Medical emergencies can happen to anybody at any time and can cause significant debt no matter how well insured or how well prepared somebody is," Grimes said. "And that is why medical debt should not be reflected in credit reports. We know that having medical debt is not a good predictor of whether someone can pay their bills or is responsible with their money."

An adverse credit report can linger, complicating the lives of consumers.

In Montgomery's case, the collection agency reported the unpaid balance to major credit reporting companies. She filed a complaint with the consumer protection bureau and demonstrated that the doctor had never directly billed her or her insurance company. Instead, the doctor's practice sent the debt to a collection agency. The bureau sided with her, and the collection agency said it would stop trying to collect the debt.

But the ordeal still cost her. She signed a lease for a Kia Sportage, and her monthly payment increased because of her lower credit score.

"The hit to my credit score was actually tangible," Montgomery said. "It wasn't just anxiety."

His toe was amputated; then his credit took a nosedive

Medical debt is different from other forms of consumer debt, advocates say. So it's unfair to dock a person's credit for unexpected medical bills, said Patricia Kelmar, senior director of health care campaigns at U.S. PIRG Education Fund.

"These debts are on reports that are being used to determine whether you should trust this person is making valid financial decisions − that's what a credit report is," Kelmar said. "But medical debt sits totally outside of that type of individual decision-making."

Unlike consumers who run up credit card debt to finance a trip or buy luxury goods, people who incur medical debt often do so under emergency circumstances, Kelmar said.

George Curlee, 50, recently had his his toe amputated because of complications from diabetes. He spent two weeks in the hospital recovering, an extended medical stay that left him with more than $20,000 in medical bills.

Curlee, who lives in Garland, Texas, has resumed his job at Walgreens and is trying to pay back everything his Affordable Care Act insurance plan did not cover.

He had been trying to rebuild his credit score so he could have access to a credit card. With his regular shifts at a Dallas-area Walgreens, he was well on his way to improving his financial security before the medical setback. He has recovered medically, but his credit score took a big hit. 

"I do as much as I can, but it's still kind of stressful knowing that you've got thousands of dollars that you've got to pay back," Curlee said.

For patients diagnosed with cancer, the financial pressure can be especially overwhelming.

Cancer patients face extreme financial pressure while battling illness, according to a study released last month that found 99,000 Massachusetts cancer patients struggling with debt. The study, by researchers at Beth Israel Deaconess Medical Center and Harvard Medical School, found cancer patients were nearly five times more likely to face bankruptcy than patients who didn't have cancer. Average credit scores for cancer patients were almost 80 points lower than for patients who did not have cancer.

Often, the credit hits lingered for years. Some people with bladder, liver, lung and colorectal cancers reported their lower credit scores lasted nearly 10 years after their diagnosis. 

Collectors cite 'economic gut punch'

Though consumer advocates and patients with medical debt support additional protections, doctors and collection agencies have pushed back against them.

Many of the more than 74,000 comments submitted in response to the Consumer Financial Protection Bureau's proposed rule describe how it would harm hospitals, doctors, dentists, therapists and collection agencies that rely on these payments.

Some doctors said they would be forced to collect payments up front, which could reduce access to care for some patients. Others said it could financially harm medical practices and possibly cause them to close in rural communities where patients have limited options for care.

Brad Klein owns Paid in Full Inc., a six-employee agency in Phoenix that collects on unpaid medical and dental bills and other debt unrelated to health care.

Klein said his company serves small medical and dental practices, many of which have been financially harmed by the federal prohibition on credit reports for bills under $500.

"Almost immediately after the $500 rule came about, (consumers) would say to my collectors: 'I don't have to pay this. You're not going to be on my credit, so I'm not going to pay it,'" Klein said.

Those bills are often too small to justify the expense of hiring an attorney to pursue legal action.

It would be an "economic gut punch" to enact the no-credit reporting rule for larger debts, Klein wrote in a comment to the consumer protection bureau.

"The incentive for the patient to pay is effectively going to be eliminated because there's no recourse," Klein said.

Scott Purcell, CEO of ACA International, a trade group representing collection agencies, law firms, asset-buying companies and creditors, said in a submitted comment that the rule, if finalized, would result in more consumers being sued and higher borrowing and medical costs.

Purcell's comment said the rule "does not solve that core issue because it focuses on the final stages of a lengthy and complex process of delivering and paying for medical care."

Debt collectors say credit reporting remains an important tool to make patients accountable, but consumer advocates say patients need protection from unfair credit downgrades.

"No matter who is in the White House, they are going to have to pay attention," Grimes said. "This affects so many people that anybody who sits in that office who wants to keep that job needs to pay attention."

Ken Alltucker is on X at @kalltucker, contact him by email at [email protected].