Curse of the Zombie Debt

In June 5, 2006

A recent article in the St. Petersburg Times, “Buyers Give Old Debts New Life,” provides a revealing look at the problem of “zombie debt.” (See my blog post of 5/19/06 on this subject.) In the debt industry, zombie debt is debt that is past the Statute of Limitations for collection through the court system. This is also called “time-barred” debt, because it has aged past the point where collection can be forced by legal means.

Let’s dispel one important myth about zombie debt right away. It is not illegal, or a violation of the Fair Debt Collection Practices Act, for a creditor to bring a lawsuit on a time-barred debt. Just because the debt has aged past the Statute of Limitations does not mean that a creditor will never sue to collect. Rather, it is up to the person being sued to assert the time-barred status of the debt as a defense. If this can be documented, then and only then will the suit be dismissed under the Statute of Limitations. Many debtors become complacent on this point, and are surprised to see lawsuit activity on older accounts. (Although the majority of debtors are not even aware of the Statute of Limitations in the first place!)

Another important point to bear in mind when dealing with old collection accounts is to ensure that you are looking at the correct Statute of Limitations. The statute period varies from one state to the next. So you have to check the rules for your specific state rather than rely on the generic “4-6 years” commonly cited. Further, there are different types of statute: one for written contracts, one for verbal contracts, another for promissory notes, and still another for open-ended accounts. It’s the latter category (open-ended accounts) that is typically the statute that applies in the context of revolving debt, with credit card debt as the single most important category of revolving debt. It’s crucial to bear in mind that some states use the same statute period for all four types of contract, where others have different statute periods for the different types of debt. This can often make a HUGE difference in the status of an account. For example, in Ohio, the SOL for a written contract is 15 years! Yet for open-ended debt (credit cards) it’s only 6 years.

One more thing to consider: The game in collecting zombie debt is to trick the debtor into making a small payment to get the pressure off, or transferring the balance to a new account (under the lure of improving their credit score). Both of these moves can be deadly. Why? Because ANY payment activity starts the Statute of Limitations all over again! It doesn’t matter if the debt is from 1950. If you make a payment, you reset the clock and the debt is no longer time-barred.

The above warnings notwithstanding, I do not take the position that the debt purchasing industry is “evil.” Some consumer advocates describe such companies in very derogatory terms. Others recommend that debtors never settle their debts with such companies. In my opinion, these are naive and dangerous recommendations. Call this industry evil if you want to vent, but that won’t prevent the damage that comes from ignoring their collection claims. By telling consumers to never settle debts with debt purchasers, some consumer advocates are setting up those debtors for serious trouble. If you are past the Statute of Limitations, that is one thing, and there is really very little point in settling an account that is “time-barred.” If the statute period has not expired, however, ignoring collection activity is a risky proposition. This is one reason I am so adamantly opposed to bogus “debt elimination” programs. The frivolous tactics used by promoters of these techniques succeed at most in getting one company to sell its claim to another. Who wants to keep going to court over the same debt, year after year? It’s better to negotiate a workable agreement and put the matter to rest once and for all.

So I do not think that debt purchasing is an inherently “evil” practice. I DO think there are problems with how the debt purchasing industry documents its claims (poorly in most cases), and also how they calculate current claim balances. I still can’t quite figure out why someone purchasing a debt THAT HAS BEEN PREVIOUSLY CHARGED OFF should be entitled to inflate that charged off amount with interest. Further, I don’t see how they should have the right to inflate it FROM THE TIME OF CHARGEOFF (as many debt purchasers do), when a period of several years may have elapsed between the chargeoff date and the date of purchase. So it’s important to understand the game when you are dealing with debt purchasers. But in my view, debt purchasing provides additional opportunities for debtors to resolve older collection accounts through the negotiation of mutually agreeable settlements.



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