CFPB says medical debt may unfairly affect credit scores
On behalf of Bill Maddox
Medical bills can present different challenges than other types of debt, since they are often so substantial and difficult to predict. Not only is it impossible to know when a major illness, injury or other medical issue is likely to arise, but the actual cost of care often remains unknown to a patient until after he or she has already received treatment.
In this way, medical debt is very different from most other types of debt, such as credit cards or car loans, where consumers know exactly how much money they are borrowing at the outset. To make matters worse, recent research by the Consumer Financial Protection Bureau suggests that overdue medical debts may unfairly affect borrowers’ credit scores in comparison to other types of debt.
Credit reports use complex algorithms to give lenders an idea of how likely a person is to pay back the money that he or she borrows. In its analysis, the CFPB examined 5 million credit reports from 2011 through 2013 in order to assess how accurately those reports predicted the likelihood that a borrower will back his or her debts.
The research revealed that people with medical debts often had their creditworthiness underestimated by about 10 to 20 points. For some borrowers, this margin can make the difference in their ability to qualify for a loan with favorable terms, or even qualify at all.
Uninsured in Tennessee at risk of medical debt
About 14 percent of people in Tennessee were uninsured in 2011 and 2012, according to data from the Henry J. Kaiser Family Foundation. Although the health care landscape in Tennessee and throughout the nation has been undergoing rapid change in recent months as a result of the Affordable Care Act, many people still lack adequate health care coverage and must go into debt to pay for the care they need.
When a major illness or injury strikes, these debts can quickly spiral out of control. Furthermore, even for those who do have health insurance, high deductibles, premiums and copayments can still contribute to substantial debt when medical issues arise.
Medical debt and bankruptcy
Unpaid medical debt has taken the lead as the biggest contributor to bankruptcy filings in the United States, NBC News reported. An estimated 2 million people in the U.S. filed for bankruptcy due to overwhelming medical bills in 2013. This was more than the number of bankruptcy filings that year for any other type of debt – including credit card bills and mortgage loans, which have typically been involved in a large percentage of personal bankruptcies.
Although bankruptcy is not always the right solution when debts get out of hand, for some borrowers it can offer an invaluable opportunity to eliminate those debts and start over with a clean slate. Unlike certain other types of debt, medical debts are typically dischargeable during the Chapter 7 bankruptcy process. This means that eligible debts are wiped out completely, leaving the borrower with no legal obligation to repay. Importantly, for those dealing with constant calls and harassment from bill collectors, bankruptcy can also stop collection actions from creditors.
Talk to a lawyer to learn more
If you are interested in learning more about bankruptcy and how it can be used to help eliminate medical bills and other debts, set up a consultation with a bankruptcy law firm in your area. A lawyer with experience in bankruptcy law can help you understand your options and evaluate whether bankruptcy may be a good fit for your individual circumstances.