California Governor Signs Law Removing Medical Debt from Credit Reports

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California Governor Gavin Newsom has signed Senate Bill 1061 into law, effectively banning nearly all forms of medical debt from appearing on consumer credit reports. The legislation, introduced by Senator Monique Limón (D-Santa Barbara), aims to protect Californians from the financial burdens that often come with unexpected medical expenses, which can negatively impact their credit scores and limit access to housing, loans, and even employment opportunities.

“Medical debt really does not belong on credit reports,” said Jenn Engstrom, state director of the nonprofit California Public Interest Research Group, which supported the bill. Engstrom highlighted that medical expenses, unlike other forms of debt, are often beyond a person’s control. “You might get into a car accident, or all of a sudden you have cancer, and have these expenses,” she explained. Engstrom estimated that about one in five Californians currently has unpaid medical debt, which can create additional barriers beyond the financial strain of the debt itself.

The new law, which takes effect in January, prohibits the inclusion of most medical debts on credit reports. However, due to initial opposition from lenders, an amendment was made to exclude debt from specialty medical credit cards and debt incurred for cosmetic procedures that are not medically necessary. Despite this compromise, the law is seen as a significant victory for consumer rights advocates who have long argued that medical debt should not factor into credit scores.

“Medical debt often ends up on credit reports, making it more challenging to apply for a credit card, a loan, or even to secure housing and employment,” Engstrom said. “That’s why it’s really important that California is now moving towards a fairer credit system.”

The passage of SB 1061 comes as the federal Consumer Financial Protection Bureau (CFPB) is also considering similar regulations to keep most medical debt off credit reports nationwide. If enacted, the proposed rule would prevent credit reporting companies from sharing medical debts with lenders and would prohibit lenders from using medical information when making credit decisions.

Senator Limón emphasized that the new law will help improve the lives of millions of Californians. “Removing medical debt from consumer credit reports will improve the financial well-being of people who have been unfairly burdened with medical expenses on their credit reports,” she stated.

With the law now in place, California sets a precedent for other states and continues its role as a leader in consumer protection, ensuring that residents have a fairer chance at achieving financial stability.