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Zombie Debt: What It Is and How to Deal with Collectors

By Kira Botkin

zombie debtIf you’ve had debt in the past you couldn’t pay, some of those accounts may have been written off as “uncollectable.” In other words, the company may have stopped trying to collect because they were unable to get you to pay or to reach you at all.

However, in recent years, a new breed of debt collector has started to buy these old debts and is attempting to collect on them all over again.

Given their propensity to rise from the grave, these debts are known as “zombie debt.”

What Is Zombie Debt?

When a person can’t or won’t pay a debt, the lender has a number of different methods by which to get back their money. These usually include harassing phone calls, letters, and possibly even wage garnishment.

In many situations, however, the debtor has moved away and can’t be found, or simply has no money. After a while, it is not cost-effective for the lender to continue collection attempts and the accounts are thus “charged off” and taken off the lender’s books. Most lenders will stop trying to collect entirely once the debt is six years old because at that point it has passed the statute of limitations, and the debtor is no longer legally required to pay it.

However, those old debts still have some value, and while the original lender may no longer find it worth their while to try to collect, other companies do. Uncollectable debts are often sold for a small percentage of their original face value to other debt collection companies, even if the statute of limitations on whether the debt can be collected has passed.

Since the zombie debt collection company pays so little for the debts they acquire, getting paid on even a fraction of the loans makes for a profitable business model. Most companies that buy uncollectable debts pay about 3% of the face value of the loan. That is, if the original debt was $1,000, the new creditor will pay about $30 for it. If this company can get just one person to repay a $1,000 debt in full, that covers costs to purchase more than thirty similar loans.

Most of the time, however, such a debt is years old, the debtor won’t remember it, and it might not even show up on their credit report anymore. Or, perhaps, the debtor declared bankruptcy, but forgot to include that debt in the bankruptcy petition. Regardless, if the debt is old enough, the debtor may not be legally required to settle it. Most states have a statute of limitations on how long a lender can attempt to collect on a debt. While the debt is still considered valid even after the statute of limitations has passed, you aren’t legally required to pay it.

What to Do If You’re Contacted About Zombie Debt

Follow the steps below to understand your rights and protect yourself if someone tries to collect a zombie debt from you.

  1. Don’t spend any time with someone on the phone. If they call, just ask for the debt collection company’s address and instead send them a letter as instructed below.
  2. Never acknowledge that the debt is yours. It may very well not be, but giving them any hint otherwise allows them to use it as evidence against you.
  3. If they send you a letter, keep it.
  4. Send a certified letter to the debt collection company within 35 days of their contact. Dispute that you owe the debt and ask them to prove that you do owe it. See this template for how to write this letter.
  5. Don’t contact or talk to the collector for any reason until you receive written proof of the debt’s validity or a judgement against you, as well as the name and address of the original creditor if the debt was resold. The Fair Debt Collection Practices Act (FDCPA) requires the debt collection agency to provide you with all of this information.

Once you receive the information about the debt, you’ll be able to determine if the statute of limitations has passed or if it’s even your debt at all. In some cases, zombie debt can be the result of identity theft, computer error, or a fraudulent attempt to get money from you for a debt that doesn’t exist.

If the debt was part of a bankruptcy that you filed (and therefore should have been forgiven), the original lender may not have received the discharge order or improperly processed it. You can get a copy of the discharge order from the bankruptcy court and send it to them again.

The statute of limitations begins on the last date that there was “activity” on the debt. Usually, this is the last payment. Under the FDCPA, a debtor cannot be sued to collect the debt after six years. After seven years, the debt must be removed from credit reports. Individual states often have an even shorter statute of limitations on debts.

If you have decided not to take any action on a zombie debt, but continue to be contacted by the debt collection agency, write them another letter (you can use templates to craft these). In this letter, inform them that they cannot contact you unless it is by writing or if they are going to sue you. Since most zombie debts are beyond the statute of limitations, the debt collection agency will likely not be able to pursue legal recourse.

angry debt collector

Should I Pay This Debt?

There are virtually no scenarios in which you will benefit by paying a debt that is beyond the statute of limitations. Zombie debt is so cheap precisely because it is uncollectable. The collection agency profits by the debtors they can convince to pay, even if those debtors aren’t legally required to pay.

Many debt collection agencies motivate debtors to pay by using guilt, the debtor’s lack of knowledge, or by instilling fear. But if the debt is beyond the statute of limitations, which can vary greatly by state and the nature of the debt, you are not required to pay anything.

Sometimes, the debt collection agency may tell you that you can settle the debt for less than you owe. But this can be the absolute worst thing to do! Unless they are willing to extend you a formal offer-in-compromise in writing, paying any amount on the debt can make you liable for the debt. Specifically, any amount you pay restarts the statute of limitations.

In other words, it is no longer zombie debt and is just as valid as the debt you owe on your current credit cards or mortgage. Because of this, the debt becomes legally collectible, and the collector will have greater incentive to pursue you. It can appear on your credit report as well. In fact, even if you pay off zombie debt completely, it will show up on your credit report. This can seriously hurt your credit score as it will revive a bad debt and add late payments to your report.

If you want to pay off the debt, you are certainly within your rights to do so, but make sure you know who is benefiting. The money isn’t going to go to the original lender, but instead to the debt collection agency. For example, if you want to pay off a debt to your family doctor in order to start seeing that doctor again, realize that the doctor’s practice likely sold the debt long ago. In this situation, you might consider contacting the original lender and offering to pay them directly.

What Protections Does the Fair Debt Collections Practices Act Provide?

The Act provides several important measures to protect consumers from being harassed when companies attempt to collect debts. It also lays out strict rules on debt collection practices. The most important is enforcing a statute of limitations on collecting old debts.

  1. You can’t be sued over debts that have been inactive for at least six years, and after seven, the debt must be taken off your credit report.
  2. Debt collectors are required to refrain from lying in any way about the debt, or about what will happen to you if you don’t pay it.
  3. They’re prohibited from passing on false information about the debt, including to credit reporting agencies.
  4. If you send them a cease and desist letter, they are required to stop contacting anyone associated with you about the debt. In other words, they’re prohibited from contacting your relatives or your workplace. Moreover, if you think the debt collection agency is breaking these rules, consider recording your phone conversations with them. Just make sure you notify the person on the other end that you’re recording. Quite a few people have actually gotten money from debt collection agencies in the way of fines associated with catching them in the act of breaking the FDCPA.

Final Word

Zombie debt is a profitable business, so you can count on these debts “rising from the grave.” However, you have legal rights that allow you to verify the debt and stop the harassment. Remember, you are better off not paying the debt if it is too old to legally pursue. Find out what the statute of limitations is in your state and see if the debt shows up on a current credit report.

Have you ever been contacted about an old debt? What did you decide to do about it?

(photo credit: Shutterstock)

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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  • Gotyergoat

    Your template links in the story do not work :(

  • Gotyergoat

    Your template links in the story do not work :(

  • http://www.financialmoneytips.com @Moneyperk

    I have never had long enough debt to have a Zombie debt collector to call me. However, I have had student loan debt, and was unable to repay it right after college. They would call me personally 5-10 times a day, and even harassed family members with phone calls.

    I took them to court for excessive amount of calls. I was able to walk away debt free because of the specific times they have called me and my family.

    If anybody is in debt, the collectors will go to the extreme to get their money; ultimately hurting them selves is some cases.

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