Tiny, Hidden Credit Report Errors Can Lead to Bankruptcy
Sunday, December 12th, 2010
The Wall Street Journal recently published a new story entitled Hidden Medical Debt Trips Up Homeowners. The report documented several cases in which small medical bills that had been turned over to collection resulted in a more than 50 point drop in a homeowner's credit score.
In one situation, a homeowner attempted to refinance his mortgage, only to discover that two unpaid medical bills totaling less than $50 had caused his credit score to drop. As a result of the lowered credit score the refinancing bank demanded over $4,000 in closing costs.
In another situation, less than $500 of medical debt reported to a collection agency disqualified a homeowner from a favorable interest rate, which would have resulted in tens of thousands of extra interest charges.
In many of these situations, the consumer never knew about the unpaid medical debt – the provider simply turned the claim over to a collection agency which immediately reported it to the credit reporting agencies as delinquent debt.
According to the Journal, "otherwise well-qualified borrowers with good loan-to-value ratios and steady employment are increasingly finding it difficult to refinance because of medical billing mistakes marring their credit."
If you or a loved one has been in the hospital, you probably know that a single visit can result in five, ten or even more bills from separate vendors – the hospital, the hospital pharmacist, the anesthesiologist, the ambulance service, etc. I do not find it surprising at all that a patient would not know about one or more bills.
I think that an important point here has to do with the cascading effect of negative credit. Even a small late payment on an account can result in a dramatic lowering of your credit score. Other creditors will receive electronic notice about your lowered credit score and when permitted, they will increase your interest rate, lower your credit limit and increase penalties and fees.
Lenders Often Cause Delinquencies by Changing Terms Unexpectedly
On more than one occasion I have met with a potential bankruptcy client who was forced into Chapter 7 or Chapter 13 because of changed terms, not because of any delinquency. These changed terms can arise from a tiny delinquency – like the unknown, unpaid medical bill issue discussed in the WSJ story, or for other reasons. Recently I met with a small business owner who was completely current on his personally guaranteed revolving line of business credit. His bank was taken over by another bank which conducted an audit and, without warning, the business loan was "called in."
One minute, my client was operating a viable, functioning small business that was current on its obligations – and literally within a matter of days, that business was shut down by a bank for no apparent reason.
The point here: examine your credit reports regularly and challenge even tiny delinquency reports as the damage to your credit will arise from the existence of the delinquency as opposed to the amount of the late payment. Even small downgrades to your credit score can result in a negative debt snowball.
As you may know, there are both federal and state laws that offer a variety of protections to individuals who are in debt and who are being dunned by debt collectors. The Fair Debt Collection Practices Act offers a variety of protections in cases involving collection agencies (as opposed to the actual creditor). In other words, a credit card company can do and say certain things and remain legal, but if a collection agency does or says the exact same things, those actions would be a violation of the FDCPA and make the collection agency subject to a claim for damages.