Pushing Dollars: A Guide to Zombie Debt

by September 4, 2019
“Zombie debt” can revive old debts and cause financial hassle for consumers. (Photo credit to Pixabay)

The average American has “about 38,000 in personal debt, excluding home mortgage,” a $1,000 increase from last year, according to NBC. Depending on one’s age, the amount varies, but debt overall is still up, including credit card debt (NerdWallet reported $423.8 billion total debt in the U.S. in early 2019).

The Consumer Finance Bureau reports that one in four consumers have at least one debt in collections. 

Some of this chunk likely includes those affected by “zombie debt.” This aptly-coined practice named such because old debt is reanimated to be paid off again by unsuspecting consumers.  

How does zombie debt originate? 

Debt collectors are the typical culprit, as well as fraudulent third parties (think identity theft), who usually purchase debt, paid or unpaid, from the original creditor. Often, this debt is purchased at a “fraction of its value,” according to The Washington Post.  

Mostly, it’s debts that are so old that their consumers have forgotten about them or are no longer targeted due to the end of statutes of limitations. Depending on the state or debt type, collection agencies cannot sue consumers after a certain amount of time to get unpaid debt resolved.

According to the Consumer Financial Protection Bureau, one in four Americans contacted by a debt collection agency in 2017 felt “threatened,” and despite pleas to these agencies to cease and desist, three in four consumers reported that these collectors continued to contact them. This practice is also prevalent in zombie debt collectors, also known as “debt scavengers.” They may promise not to report the debt to their credit report or threaten to sue (or simply sue anyway). These collectors may also intimidate, pose as a “litigation firm,” or say they’ll leave the consumer alone in exchange for a small fee. 

Why are they so determined? If the consumer pays even a small chunk of the debt, regardless if it’s not theirs, collectors can sue said consumer to collect the entire debt. This is because the consumer, in paying that debt, has reset the statute of limitations. In addition, if the consumer pays the debt, even if it’s not theirs, it becomes harder to fight in court that it isn’t “their” debt. 

Zombie debt can range from credit card debt to medical debt, the latter possibly growing at a rate of $60 billion per year, reports The Hill

What can consumers do? 

Again, do not pay the debt because it resets the statute of limitations. Meanwhile, consumers are advised not to give out personal information, such as current addresses or social security numbers, since legitimate collectors will already know this information. They also must stay vigilant about what they owe by checking credit reports, as well as filing a report to the Consumer Finance Protection Bureau. These zombie debt collectors are in violation of the Fair Debt Collection Practices Act through misrepresentation, threats, and not legally following debt collection legalities. 

What’s being done? 

So far, the practice is still prevalent due to various loopholes. In fact, John Oliver, the host of HBO’s “Last Week Tonight,” famously bought $15 million of medical debt and forgave it all to showcase the lack of regulations behind debt collection industries. However, states like Washington and Oregon place a time delay on sending a medical debt to collections in order to be itemized or places limits on interests charged to bills, according to NPR. The Washington Post also reported that New York also debated regulation for a more limited time for debt collectors to collect or go after the money after the statute of limitations ran out, but failed. 

The Consumer Financial Protection Bureau recently fined the nation’s two largest debt collection corporations, Encore Capitol Group and Portfolio Recovery Associates, for buying unverified debt and pressuring its consumers with false statements and suing to “settle” debts. In doing so, consumers revived their old debt. 

The Federal Reserve has also been criticized for slashing interest rates, which may prompt the rise of zombie debt and “zombie companies,” which make up one in six “publically traded companies,” according to Business Insider. A 2018 study by the Bureau of Industry and Security criticize the rise of such debt and companies due to drops of interest rates and “banks that roll over loans to non-viable firms.” This phenomenon has also occurred in Japan in the 1900s when “the nation’s central bank lowered the interest rate to near zero,” with banks rolling over loans rather than foreclosing. However, the rate of zombie firms themselves seem to be declining.

The Washington Post reported that due to new regulatory loopholes, debt collectors may also be able to send texts and emails, and thus, reach out to more potential victims.