On November 14, 2024, California introduced a groundbreaking law aimed at transforming how medical debt impacts consumers’ financial stability. Signed by Governor Gavin Newsom, the legislation bars medical debt from appearing on consumers’ credit reports, marking a crucial step towards alleviating the financial burden often resulting from healthcare costs. As of January 2025, this law will ensure that Californians facing medical debt will no longer see their credit scores affected—a significant shift for individuals struggling with unforeseen medical expenses.
The Burden of Medical Debt on Americans
Medical debt has long been a significant contributor to financial distress for millions of Americans. Roughly 4 in 10 Californians report having some form of medical debt, disproportionately affecting low-income, Black, and Latino populations. Medical debt can lead to decreased credit scores, limiting access to essential services like housing, employment, and loans. In response, California joins a handful of other states with similar laws, while the Biden administration is exploring federal protections against medical debt on credit reports.
What the New Law Entails
Senate Bill 1061, led by Senator Monique Limón, prohibits healthcare providers and collection agencies from reporting unpaid medical debts to credit agencies. This protection is particularly beneficial in employment and tenant screening, where credit scores are often scrutinized, potentially unfairly penalizing individuals due to unforeseen medical expenses. Although some credit agencies have begun omitting certain types of medical debt (e.g., debts under $500 or those fully paid), many consumers still face significant credit report consequences from larger medical bills.
The Importance of Medical Debt Exemptions
One of the key motivators for this law is that medical debt often does not reflect a person’s creditworthiness. Medical bills can arise suddenly and are often the result of emergencies rather than poor financial decisions. Unlike credit card or auto loan debt, medical bills are rarely a choice, and they can accumulate due to billing errors, miscommunication with insurance, or high deductibles. This unique nature of medical debt makes it an inaccurate measure of financial reliability, and its inclusion on credit reports has long been questioned by consumer advocates.
Limitations and Loopholes in the Law
Despite its broad consumer protections, California’s legislation does not cover all types of debt linked to medical expenses. Patients who finance their medical bills with medical credit cards or specific medical loans will still see this debt on their credit reports. Interest rates on these financing options can reach as high as 36%, posing additional financial strain. Some consumer advocates are concerned that this loophole, added due to opposition from the financial industry, leaves certain vulnerable consumers exposed.
A Growing Movement Across the United States
California’s legislative action reflects a wider trend in the United States, where states like Colorado, Minnesota, and New York have enacted similar laws. The Consumer Financial Protection Bureau (CFPB) has reported that 15 million Americans have medical debt on their credit reports, and many states are seeking measures to remove or reduce this debt’s impact on credit.
Potential Federal Changes on the Horizon
While individual states address medical debt’s effects locally, federal changes could further protect consumers nationwide. The Biden administration proposed eliminating medical debt from credit reports in June 2024, but with pending political shifts, the future of these protections remains uncertain. If federal protections are enacted, they could provide a safety net against state-by-state policy variations and ensure universal consumer protections.
Conclusion
California’s new law barring medical debt from credit reports is a step toward reducing the financial toll of medical expenses on vulnerable individuals. By preventing medical debt from lowering credit scores, California aims to create a fairer financial landscape, allowing residents to focus on their recovery without risking financial ruin. However, with medical credit card debt still reportable, further work may be needed to close these gaps and ensure all Californians are protected from the repercussions of unexpected medical expenses.
