What is Zombie Debt? (And Can You Escape It?)
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So, you're making your way through life, making purchases here and there like shoes, a car, maybe even a house. Then, one day you get a phone call from a company that says you owe them money. Maybe you thought it was a mistake? Maybe it was a billing error? Or maybe you just forgot that you ever bought that product or service? Well, it turns out it is all of the above and then some. There's a lot more behind the scenes than just an old invoice being filed somewhere until it gets figured out at some point down the road.
There's a law called the Fair Debt Collection Practices Act (FDCPA). This law helps protect consumers from illegal debt collection practices employed by a debt collection agency, such as harassing phone calls or threats of violence. The law also states that consumers cannot be sued for debts older than six years. Sounds great, right? But unfortunately, there are a few key exceptions to that rule, one of which is zombie debt.
Related: How to Pay Off Debt in Collections
In this article
What is zombie debt?
Zombie debt is an old debt or time-barred debt (aka past their statute of limitations) that has come back to haunt you. It's a type of debt that still exists and can cause future financial problems if left unresolved. For example, you might have purchased a new car or bought a house years ago, but you failed to pay some of the bills associated with the purchase — leaving you with "zombie" debt lingering in the background. In other words, when a debt collector contacts you about a debt that has fallen off your credit report, that is known as zombie debt.
Statutes of limitations are laws that set the maximum time a creditor has to take legal action against a debtor to collect a debt. Each state's laws vary, but generally, you can expect them to last for up to six years. After the statute of limitations has expired, creditors can no longer collect on a debt from the debtor. But that doesn't mean your debt will disappear. It will still be on your credit report for years to come and can still hurt your credit score. It's important to understand the statute of limitations in your state so you can deal with your outstanding debt as quickly as possible.
Zombie debt is any debt that is still outstanding after a statutory period of time has passed (usually six years). In most cases, the statute of limitations for certain types of debts will never expire; for example, state student loans won't go away if you ignore them. However, most other types of debt are subject to a statute of limitations, such as credit card debt and medical bills. It is also entirely possible that the debt a collection agency is looking to collect from you isn't even yours, to begin with. How zombie debt works is essentially the same as any unpaid debt an agency is looking to collect.
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How to vanquish zombie debt collectors (aka debt scavengers)
These debt buyers purchase a block of debt (any kind of debt, really) for pennies on the dollar to recover some money, even as the debt may be well past its time limit. To achieve that, they employ a set of tactics that, in some cases, may be illegal. If a zombie debt collector contacts you, here's what you should do:
- Don't ignore them: When you receive a debt collection notice in the mail, your first instinct might be to ignore the letter. But that could be the worst thing you can do, and it is exactly what zombie debt collectors are hoping you would do. Ignoring the collection notice would allow collectors to sue you in court. And if you fail to appear, the default judgment might go in their favor.
- Validate the debt: If you have reason to believe the debt doesn't belong to you, you could ask for a debt validation letter that lists all information on the debt, including who the original creditor is and the total debt amount.
- Dispute the debt: If things don't check out, you can send a certified letter to the collector, disputing the debt and asking them to prove it is yours. If the debt isn't listed on your credit report, you can bring it up with the three major credit bureaus: Experian, TransUnion, and Equifax.
- Don't pay: If the debt isn't listed on your credit report, do not make any payment toward it, and don't acknowledge it is yours. In some states, making payments toward a debt makes you legally responsible for that debt.
- Know your rights: The Fair Debt Collection Practices Act protects consumers from predatory debt collection practices. Debt collectors can't harass you or threaten you with jail time. Under federal law, they can't even call you at your workplace if you've told them not to contact you at work. In addition, they can't disclose your financial situation to a family member, friend, or co-workers. Suppose a debt collector is violating the law. In that case, you can report them to your state's attorney general office or file a complaint with the Consumer Financial Protection Bureau or the Federal Trade Commission.
Related: How to Deal With Debt Collectors
How to protect yourself from zombie debt
Keep an eye on your credit report
Most people only look at their credit reports before applying for a loan or other forms of credit. But checking your credit report at least once a year helps you take care of an issue before it snowballs into a bigger problem. You can also identify if you've been a victim of identity theft and promptly take steps to resolve the issue. Many services let you . Checking your credit report annually can reveal inaccuracies in your records, and you can work to resolve them.
Know your debts
Knowing how much you owe and who your creditors are is personal finance 101. But, most of us aren't taught money management, leaving it up to us to figure things out as we go. But knowing your debts is a great defense strategy against zombie debt. If a zombie debt collector calls you and says you owe money, you'll immediately know whether they're telling the truth or looking to scam you. This is why you should always keep records of your payoff statements and payments. You never know when they may prove to be useful!
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Pay off any debts on your credit report
A collection agency may be unable to sue you over time-barred debt, but that doesn't mean the delinquency associated with unpaid debt has fallen off your credit report. This means that even though the debt is no longer legally enforceable, it still hurts your credit score. A low credit score can lead to higher interest rates. And since the zombie debt will stay on your credit report for up to seven years, it can take a huge toll on your credit score during that time period, potentially affecting your ability to get approved for credit.
This way, you should try to pay off the debt. Your best option is to contact the lender and try to negotiate a settlement. In many cases, you can work out a payment arrangement that you can live with, which could include making a small payment. You could also take help from a debt relief company, which will help you with debt management and settle the debt for an amount lower than what you owe.
Make some calls
The first step is to request that any company reporting the delinquent debt to credit agencies remove it from your credit history to keep the damage it causes to a minimum. Secondly, you can contact the creditor directly and ask them to take the proper steps to remove the zombie debt from your credit report. If you successfully negotiate with the creditor, you can ask them to issue you a validation letter to confirm that the debt is no longer valid. Finally, you can apply for credit counseling services that will help you develop a plan to repay your debts and help you at the same time.
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The bottom line
Debt, whether it's medical or simply from borrowing money to buy a house or car, can be difficult to manage and can lead to feelings of anxiety, stress, and guilt. For some people, those debts can feel like an impossible weight to overcome. But the reality is that debt is a part of everyday life for most people.
A very old debt or debt no longer owed is called zombie debt. It can also be settled debts, a time-barred debt, debt that isn't yours, or debts that are no longer on your credit report. When faced with such a call from debt collection agencies, the onus is on you to ensure the debt's legitimacy. Because otherwise, you risk resetting the clock on the statute of limitations, meaning you'll have no other way of getting rid of this debt than to pay the money.
That's why fighting back against zombie debt is important and protecting yourself from any future mishap. Fortunately, there are several steps you can take to achieve just that. Through careful planning, you can not only eliminate the negative effect of zombie debt on your credit report, but you can also build a positive credit history that will help improve your credit score and your chances of getting approved for loans in the future.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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