New York Removes Medical Debt from Credit Reports

US Morisso

Implications of New York’s decision to remove medical debt from credit reports, with a focus on the potential impact on creditors in the US.

- Reduced ability to collect on medical debt: Without the ability to report medical debt to credit bureaus, creditors will have a harder time pressuring debtors into paying their bills. This is because a good credit score is essential for obtaining favorable terms on loans, mortgages, and other forms of credit. Knowing that their credit score will not be affected, some debtors may be less likely to prioritize paying off medical debts.

- Increased reliance on alternative collection methods: With the traditional credit reporting avenue restricted, creditors may need to resort to more direct and time-consuming methods of collecting debts. This could involve sending letters and emails, making phone calls, and even initiating legal action. These methods can be expensive and less effective than using the credit reporting system.

- Potential financial losses: The inability to collect on medical debt could lead to financial losses for creditors. The exact amount of these losses is difficult to predict, but it could be significant depending on the level of medical debt in a creditor’s portfolio.

- Reputational damage: The New York law could also damage the reputation of the credit reporting industry. Critics of the industry have long argued that medical debt should not be included on credit reports, as it can unfairly penalize people who have been through tough times. The New York law could lend credence to these criticisms and lead to calls for further reforms to the credit reporting system.

- Pressure for similar legislation in other states: New York is not the first state to consider removing medical debt from credit reports. California, Massachusetts, and Illinois have all passed laws in recent years that limit the reporting of medical debt. If the New York law proves to be successful, it could put pressure on other states to enact similar legislation.

- National policy changes: The New York law could also add fuel to the growing movement for national reforms to how medical debt is handled. In recent years, there has been a growing bipartisan consensus that the current system of medical debt collection is unfair and unsustainable. The New York law could provide a model for national reforms that would protect consumers from the negative consequences of medical debt.

- Uncertainty and potential litigation: The New York law is likely to face legal challenges from the credit reporting industry. The industry argues that medical debt is a legitimate form of debt that should be reported to credit bureaus. The courts will need to decide whether the New York law violates federal laws or regulations. This could lead to a period of uncertainty for creditors, as they wait to see how the legal challenges play out.

- Changes to credit scoring models: In the long run, the New York law could lead to changes to the way credit scores are calculated. Credit scoring models are complex algorithms that take into account a variety of factors, including a person’s credit history, employment history, and debt-to-income ratio. If medical debt is no longer reported to credit bureaus, it will need to be replaced with other factors in credit scoring models. This could have a significant impact on the creditworthiness of millions of Americans.

- The New York law is a significant development in the ongoing debate over medical debt. It is too early to say what the long-term impact of the law will be, but it is clear that it has the potential to reshape the way medical debt is collected in the United States. Creditors will need to closely monitor the situation and adapt their collection practices accordingly.

- The Consumer Financial Protection Bureau: https://www.consumerfinance.gov/