Night of the Living Debt

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Susan and Tom were in their early thirties, and both had promising careers. Having only been married a few years, they had met with a financial advisor to discuss strategies for their growing family.

Susan was due with their first child in a few months and they were both scared and excited about buying their first home. Susan was a saver, having learned the importance of planning early from her parents, so they both agreed to diligently sock away the 20% down payment they needed for a house in a neighborhood with a highly rated school system. Tom was also determined to ensure that he and Susan begin planning early for their future, by not only making sure they had enough life insurance to cover each of them, but also by setting up a 529 plan as soon as the baby arrived.

Then one day they got a call from a collection agency regarding an outstanding debt that supposedly Tom owed from before they were married. Tom couldn’t remember having any outstanding debt, so he was just as surprised as Susan with the call. Tom spoke to the creditor and not knowing for sure that it was his, inadvertently accepted responsibility for the debt.

That started a chain reaction that ultimately affected his credit. It turns out, unbeknownst to Tom, that there had been fraud activity on one of his dormant credit cards. When Tom finally found out that the debt was not actually his responsibility, it was too late. The damage was done and his credit score took a serious hit, which ultimately affected the final interest rate that they were able to get for their new house.

How could this have happened?
Most companies will make every effort to contact an individual to receive payment on a past due account. Unfortunately in Tom’s case, because it was due to fraud on an old account, the company most likely had an incorrect address and phone number, so they were unable to contact Tom and eventually gave up. Since payments are unlikely for debts over 180 days past due, these items can no longer be shown as an asset on the company’s balance sheet, per the general accounting rule. These debts are then normally charged off and removed from the books.

Just because a debt is charged off by a creditor does not mean that they will stop trying to collect it.

It is commonplace for companies to sell their old and uncollected debts at a discount to third-party debt collection agencies. These agencies will try harder to track people down, because they have dedicated staff.

There are two ways debt collection agencies can profit from purchasing these old debts. They can try and collect the debt, which is then given back to the original creditor, with the collection agency retaining a fee for their service, or they can buy all of the debt outright and then keep any money they are able to recover.

What is Zombie Debt?
Even when the original creditor might not find it worth their while to continue to try to collect on debt, some third party debt collectors do. Because third-party debt collection agencies can purchase these debts outright for pennies on the dollar, they have a great incentive to contact you, even if the statute of limitations has passed. As long as they get paid on even a small number of accounts they purchase, reviving these “zombie” debts can be very profitable for them.

Each state has its own consumer protection laws that cover collection of debt by a lender or creditor, with each also having respective statutes of limitations (SOL) regarding how long a period of time a creditor or collection agency can sue a debtor in court for the money owed. For example, in the State of Ohio the SOL is six years regardless of the type of debt. What this means is that a debtor can be sued in court for a period of six years; with this six year period beginning when the debt first officially becomes overdue.

Be aware that, even though a creditor charges off your debt and the SOL expires, late, unpaid or charged off debt stays on your credit report for seven years. This can present significant issues for someone who chooses not to pay their debts, because any charge offs or judgments assessed against them in court can result in significant harm to their overall credit reporting and credit score (a judgment can remain on a credit report for up to 10 years).

Another thing to keep in mind is that more and more employers are making job offers contingent upon background checks, which include a thorough review of a prospective employee’s credit report. Landlords do the same. A credit report showing court judgments, a history of late payments and low credit score can significantly impact a person’s ability to obtain credit, especially a home mortgage or car loan.

For these reasons, it is vital to understand the nature of zombie debt and how to protect yourself. Make sure you understand your rights. Follow the instructions below to learn ways in which to protect yourself if you are contacted regarding a debt you are not familiar with:

  1. Request the debt collection company’s address and send them a certified letter within 30 days of their phone call requesting that they prove that you owe the debt and name and address of the original creditor of the debt that was resold.
  2. Do not talk to anyone on the phone until they verify the debt’s validity or a judgment against you.
  3. Maintain a file containing any correspondence relating to any issue with debt.
  4. Remember, the Fair Debt Collection Practices Act (FDCPA) requires the debt collector to provide you with the information you are requesting.

Should I Pay Zombie Debt?
Once you obtain the information regarding the debt about which you have been contacted, the first thing you need to do is find out if it’s even your debt. The debt could be the result of identity theft, a computer error or simply fraudulent activity. If the debt does belong to you, find out if the statute of limitations has passed.

Zombie debt collectors might offer you a settlement amount that is significantly less than you originally owed via a lump sum or installment payments, but paying any amount on the debt can restart the statute of limitations again. If the debt is yours and the statute of limitations has passed, it might be in your best interest to contact a consumer law attorney for advice before deciding whether or not to pay the debt.