California Bans Medical Debt from Credit Reports

California recently enacted a new law broadly prohibiting the use of medical debts in consumer credit reports. The law, SB-1061, is part of a growing national movement to ban consumer reporting agencies (CRAs) from reporting on medical debt and creditors from using consumers’ medical debts in credit, employment or housing decisions. The policy reason for the ban is that most medical debts arise from unexpected health emergencies rather than from intentional financial decisions.

With its new law, California joins a dozen other states that have restricted the use of medical debt in credit decisions. California’s law goes into effect as the federal government’s recently proposed regulations imposing similar restrictions nationwide remain mere proposals.

Medical Debt’s Harmful Effects on Consumers’ Credit

According to Consumer Financial Protection Bureau (CFPB) estimates, approximately 15 million people in the United States have outstanding medical debts on their credit reports, which can drag down their credit scores and make it challenging to lease housing, qualify for mortgages, borrow money or obtain employment.

Although Congress passed the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) to prohibit creditors’ access to information regarding consumers’ medical debts, various federal financial regulators issued regulatory exemptions to this prohibition, allowing creditors to use consumers’ medical debts to determine eligibility for credit. As a result, consumers who have incurred significant debts for life-saving medical treatment have for decades continued to suffer the negative consequences of those debts appearing on their credit reports.

This past June, the CFPB proposed a rule to address these negative consequences. The rule would remove the regulatory exemptions to the FACT Act and reinstate the broad prohibitions on creditors’ use of medical debts to determine consumers’ creditworthiness. But, creditors could still use information about medical debts if the information related to the purpose of the loan or when considering disability income and related payments.

The proposed rule would also prevent CRAs from including information about medical debts in consumer credit reports sent to creditors for use in credit decisions. As a result, the rule would prevent creditors from seeing or receiving information about medical debt in many circumstances. However, CRAs would not be prohibited from including medical debt in consumer reports if they believed a creditor was not prohibited from obtaining or using information about medical debt. Finally, the proposed rule would prohibit creditors from repossessing medical devices if a consumer cannot repay a loan taken out to purchase the device, and would prohibit creditors from using medical devices as collateral for loans.

Not content to wait for the CFPB to finalize its proposed rule—which might never be finalized now that Donald Trump will return to the White House on Jan. 20, 2025—several states have already passed legislation prohibiting the publication of medical debt on residents’ credit reports or the use of medical debt in making credit, housing or employment decisions.

Now, California, the most populous state in the country, and one with 38% of its residents carrying medical debt according to the California Health Care Foundation, joins the list of states restricting the use or inclusion of medical debt in credit reports.

Understanding California’s Prohibition on Medical Debt in Consumer Reports

California SB-1061, signed into law this past September by Gov. Gavin Newsom, blocks health care providers and medical debt collection agencies from sharing information about consumers’ medical debts with CRAs. The law also prohibits CRAs from creating credit reports containing information about medical debts. Entities that use credit reports in connection with credit decisions may not use medical debt as a negative factor when making such decisions.

A health care provider or medical debt collection agency who knowingly furnishes information about a person’s medical debt to a CRA may suffer penalties that include voiding of such debt. Violations of the new law by licensed medical providers also constitute a violation of the law governing that provider’s license. Similarly, violations by licensed debt collection agencies would also constitute a violation of the law governing that license. Because violations of some California licensing statutes may constitute crimes, licensed providers who violate the new law may face grave consequences.

California’s SB 1061 further requires healthcare facilities to maintain records regarding money that a patient or their guarantor owes to the hospital. Any contract regarding the assignment or sale of a medical debt must require the assignee/buyer and any subsequent assignee/buyer of such debt to maintain records relating to any litigation over the debt for five years.

The new law also requires health insurance companies to notify patients and healthcare providers when the insurer sends payment for healthcare services directly to the patient instead of the provider. In such a situation, when a provider does not receive payment from the insured within 60 days of receipt of notice from the insurance company or within one year of the initial billing for services, whichever occurs later, the law allows the insurer’s share of cost held by the patient not paid to the provider to be reported to a CRA as medical debt.

SB 1061 also requires all contracts creating medical debts, executed on or after July 1, 2025, to include language informing patients of their rights under the new law.

Interestingly, SB 1061 does not cover medical debts incurred with medical credit cards or medical specialty loans, which can have interest rates in the mid-30% range; these debts can still be reported on consumers’ credit reports. Lobbyists who advocated for this exemption noted that medical credit cards could be used to purchase non-medical goods or services, and that medical loans could be refinanced with non-medical credit, potentially blurring the line between medical and non-medical debt.

Prohibition on Medical Debt Credit Reporting Could Have Implications Beyond California—Including in Pennsylvania

According to the National Conference of State Legislatures, 12 other states besides California have enacted statutes regulating medical debt credit reporting. But given its size (just shy of 40 million residents according to the 2020 U.S. Census, and a $4.08 trillion gross state product that would make it the world’s fifth largest economy), when California speaks, private actors must listen.

As with various environmental regulations, it often makes sense for private actors doing business in California to change how they do business across the United States in the face of new California laws so they can reduce costs and find efficiencies by treating their California compliance requirements as the floor of their nationwide requirements.

Though health systems not operating in California likely need not worry too much about California’s new ban on medical debt credit reporting, insurers, CRAs, and other players in the healthcare industry who do business in California may have to. Thus, while California’s new prohibition on medical debt credit reporting will primarily help Californians avoid devastating effects on their credit caused by incurring such debt, the prohibition might also compel healthcare industry players to change their practices nationwide, which might help residents of other states escape the ills of medical debt.

Closer to home, Pennsylvania has not enacted a statute regulating medical debt credit reporting, but eliminating medical debt is apparently on the minds of state politicians. That’s no surprise given that an estimated one million Pennsylvania residents carry some amount of medical debt.

In his February state budget address earlier this year, Pennsylvania Gov. Josh Shapiro announced he wanted to use $4 million of taxpayer dollars to eliminate medical debt for thousands of Pennsylvanians. This announcement follows legislation proposed in 2023 by State Rep. Arvind Venkat of Allegheny County that would create a medical debt relief program for Pennsylvanians with low incomes.

While these are laudable first steps, nothing short of a ban on medical debt credit reporting that’s on par with California’s ban will protect Pennsylvanians from the damaging effects of their credit reports showing large amounts of medical debt. California’s ban provides a template for Pennsylvania politicians to adopt and enact which, despite the political divide across the commonwealth, would be encouraged and well-received by voters on both sides of the aisle.

Jim Francis is a founding shareholder of Center City-based Francis Mailman Soumilas, a leading consumer rights law firm. He has served two terms on the Board of Directors of the National Association of Consumer Advocates. He can be reached at jfrancis@consumerlawfirm.com.