It’s spooky season, and what could be scarier than debt you thought you laid to rest rising up from the grave to haunt your financial future? Today, let’s talk about zombie debt.
Can debt really rise from the grave?
Zombie debt refers to old debt that is often believed to be taken care of or past the statute of limitations when borrowers can no longer be sued for repayment. This can include “a liability that has been discharged in bankruptcy, a debt you have already settled or an account that doesn’t belong to you.” This may even include debt that was created by someone stealing your identity or mistakenly attributed to you due to a clerical error.
This debt can be resurrected, often by debt collection companies, who have found that purchasing such debt in large batches from the original lender for pennies on the dollar and scaring past borrowers into repayment – with plenty of interest – to be exceptionally lucrative.
Zombie debt = quick cash
An investigation by Bloomberg last October found that several debt collectors in the United States were taking advantage of zombie debt in the form of second mortgages, or “sleeper seconds” that had originally been taken out during the housing bubble. When the housing market crashed during the Great Recession, many lenders chose to write off the second mortgages – which now were essentially worthless – and stopped sending statements to borrowers. Some borrowers received notices that their debt had been forgiven and others believed their second mortgage had been rolled into their first mortgage when they refinanced their homes in the years after the crash. Bloomberg’s analysis estimated that there are more than 600,000 second mortgages issued before the housing crisis that could still come back to haunt borrowers today.
Despite consumer protection laws and limits to how much interest can accrue on old debts, these debt collection companies have focused on putting the fear of losing homes in borrowers. And it often works. Bloomberg found that borrowers who stayed current on their first mortgage were most likely to be targeted, and since they had more invested in their home were also more likely to make a deal with the collection agency if they did not have the means to hire a lawyer to fight the collection.
As an example of how lucrative these zombie debt collectors can be, a lawyer involved in a class-action lawsuit representing thousands of borrowers impacted by zombie mortgages told Bloomberg reporters that one debt collector demanded a borrower pay $193,000 on a $79,000 second mortgage that they had purchased for only 67 cents.
The regulator is now a zombie too
The Consumer Financial Protection Bureau (CFPB) was created shortly after the 2007-2008 financial crisis to protect consumers from these exact practices. The CFPB handles complaints from consumers, oversees financial institutions, enforces consumer protection laws, and has broad discretion to investigate “unfair, deceptive, or abusive acts and practices.”
In 2015, the CFPB fined the two largest debt buyers for similar practices, and was still investigating many of the zombie debt collectors just a few years ago. Unfortunately, the current administration has gutted the agency’s operations so deeply that a headline in The New Yorker referred to the CFPB as “The Zombie Regulator” earlier this year. According to a former general counsel of the agency, the bureau “dropped at least forty lawsuits and other enforcement actions, valued at more than three billion dollars” that would have put money back in consumers’ hands.
