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Federal agency says medical debt unfairly impacts credit scores

In May 2014, the CFPB issued a report saying that traditional credit formulas penalize those with medical debt more heavily than those with other types of debt.

Many are aware of the skyrocketing costs of health care in the U.S. because they have had to struggle to pay medical bills. Unexpected illness can put a person into a financial tailspin, impacting his or her credit report and financial affairs well after recovering from the illness. In May 2014, the Consumer Financial Protection Bureau issued a report that showed that medical debt may have a more damaging impact on consumers' credit reports than other forms of debt.

Millions struggle with medical debt

Medical debt is a widespread problem in the U.S. The consumer finance website NerdWallet Health reported that about 56 million people in the U.S. under the age of 65 years old had difficulties paying their medical bills in 2013. NerdWallet also found that more than 15 million adults in the U.S. aged 19 to 65 years old spent all of their savings to pay their medical debt in 2013. For 1.7 million people, medical debt caused them to file bankruptcy in 2013.

Report shows damage medical debt does to credit

Those struggling with medical debts may suffer more financially than those who have other types of debt. According to the CFPB, the federal agency charged with enforcing federal consumer protection laws and studying information about consumer financial markets, traditional credit score formulas do not take into account the differences between medical debt and other forms of debt. Often, the delays in processing bills or disputes with insurers can make accounts seem delinquent. In many cases, patients do not even realize that medical debts have gone to collection agencies because of all the delays that surround medical bills.

The CFPB report revealed that credit score formulas can underrate the creditworthiness of a consumer who has outstanding medical bills by up to 10 points. The report analyzed the credit reports of those with and without medical debt and found that those with medical debt paid off their debts at rates on par with those with credit scores 10 points higher. Similarly, credit formulas usually do not give credit for payment of medical debts that have gone to collections, and this can penalize consumers up to 22 points.

While 10 to 20 points on a credit score may not seem like a big deal, for those who are teetering on the edge of being considered "subprime" borrowers it can make a huge difference in their abilities to obtain credit at reasonable interest rates or even borrow at all.

Assistance with reorganizing finances

In many cases, medical bills can completely overwhelm a person's financial situation, and it is impossible to repay all of his or her medical bills. Bankruptcy is one option for assisting those with huge medical debts in gaining a fresh financial start. People can often discharge medical debts in bankruptcy in the same manner as other unsecured debts, allowing them to move forward without the burden of crushing debts.

If you have questions about whether bankruptcy is the right option to help you deal with your medical debts, talk to a knowledgeable bankruptcy attorney who can assess your circumstances and advise you on the best way to move forward.

Keywords: bankruptcy; debt collection; credit score