What is zombie debt?

Understanding zombie debt

Zombie debt is any type of debt that the original creditor isn’t trying to collect anymore, but that doesn’t always mean it goes away completely. As Joe Camberato, CEO of NationalBusinessCapital.com, said, “Zombie debt is essentially old debt that comes back to haunt you.” Debt collections agencies may still try to take advantage of borrowers who are unaware of their rights.

Some types of zombie debt include:

• Debts that may have shown up on your credit report, but have fallen off after the typical seven years.
• Discharged debts, which were once legally your debt but have been discharged from your record, as may happen with some bankruptcy debts.
• Settled debts, where you have paid an agreed-upon amount to the original creditor in exchange for written notification that your obligation is completed.

Collections agencies purchase outstanding debts from the original creditors, often for pennies on the dollar. This may be because the statute of limitations for collecting on that debt has passed or the creditor decided not to pursue enforcing repayment, but collectors buy those debts at a bargain, hoping to make a profit with whatever consumers are willing to pay.

The Consumer Financial Protection Bureau (CFPB) has warned consumers about zombie mortgages, in which homeowners have believed their mortgage debt to be either forgiven or satisfied, only to receive pushy debt collections notifications.

How does zombie debt come to life?

Although your original creditor may not even be the one trying to get you to pay, you still need to pay attention. The term “zombie debt” is quite accurate: Your debt may seem dead and gone, but debt buyers manage to resurrect it and attack you with it. A settled or discharged debt, one that has fallen off your credit report and one that isn’t even yours to begin with may all be forms of zombie debt.

Debt collectors find old debts to purchase for much less than the original amount, then go after the original borrower to get them to pay. They’re known for utilizing scare tactics like threatening legal action, even if they have no right to sue you for payment.

It’s not just a cute term, however. Debt collectors won’t call it zombie debt — they’ll aim to convince you that you’re in trouble if you don’t pay. And in many cases, sending any amount of payment or even acknowledging the debt could reactivate the debt. For example, in the case of a debt no longer listed on your credit report, paying anything will reset the clock, putting you on the hook for the entire debt for another seven years.

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Dealing with zombie debt

You need to know how to handle bill collectors and debt collectors before they call. While paying off debt may seem straightforward, in the case of zombie debt, consumers must be cautious. Although debts don’t disappear, the length of time during which creditors can sue you for payment may be limited.

Debt verification

The primary step to take in handling debt, especially a suspected zombie debt, is to obtain a debt validation letter. If a debt collector calls or contacts you about an alleged debt, ask for proof. Collectors must provide you with a written notice within five days of the first contact regarding the debt.

According to Camberato, a collector’s refusal to provide verifying information “could be a sign of a scam or that they lack the legal authority to collect the debt.”

Per the CFPB, a debt validation letter should contain all pertinent information about you, the original creditor, the amount owed and guidance on how to dispute the debt if needed. If a collector does provide this documentation, you then have 30 days to complete a written dispute. You might dispute a debt if anything about the validation letter is incorrect, such as your name, mailing address, debt amount or the original creditor.

Camberato explained why you should tread carefully: “If you make even a small payment toward zombie debt, it can potentially become yours.” What’s more, even if it’s a legitimate debt that you owed, if you’ve already settled it, you don’t have to pay more.

Statutes of limitations

Zombie debt often becomes a problem because creditors ignore the statute of limitations on the debt. While debt collectors are allowed to continue pursuing debt repayment after the time limit, they cannot sue you or use threatening tactics.

The statute of limitations depends on the state where you live. According to the CFPB, in most states the statute of limitations is between three and six years. That means that either on the date of your last payment or on the date of the first missed payment, the clock starts on your debt. Once the statute of limitations has passed, the debt is classified as a time-barred debt and you generally don’t need to worry about a lawsuit involving that debt.

Camberato said, “Acknowledging the debt as yours or making partial payments could reset the statute of limitations, so weigh your options carefully.” Know your rights in your state and check records of your past debts to determine your timeline.

The Fair Debt Collection Practices Act, or FDCPA, stipulates that collectors can’t file lawsuits against borrowers after the statute of limitations for that state has passed. However, if a collector sues you, you may need to appear in court to formally note when the statute of limitations passed.

Reporting unfair debt collection practices

Collectors can’t threaten you with legal action or attempt to collect on time-barred debt or other similar zombie debts. If you believe a collector has violated the law, you can submit complaints about zombie mortgages or time-barred debts to the CFPB by phone or on its website.

How to prevent zombie debt

Anytime debt is involved, it’s crucial to be vigilant and to know your rights. Following a few financial habits can help you avoid becoming a target of collectors.

Monitor your credit report

A good baseline habit is to keep an eye on your credit report from all three major credit reporting bureaus. It’s relatively easy to check your credit score using AnnualCreditReport.com.

Paying attention to all financial accounts including credit cards is also essential. You can watch for any unauthorized transactions or loans, and many credit cards also provide a free credit score check either from FICO or VantageScore. Use a reputable credit report site to monitor your credit as well, and take action if anything shows up unexpectedly.

Pay debts promptly

Paying off loans and other debts according to the loan agreement is also good financial practice. You can’t necessarily prevent zombie debt this way, but you can ensure you’re submitting payments on time.

Keep careful financial records

Maintaining good financial records can also serve you in case someone comes calling for zombie debt payments. Keep a copy of written documentation whenever you pay off a debt or strike a settlement with a creditor. Camberato noted, “Be sure to get any settlement offers in writing, confirming that payment of the agreed-upon amount will fully satisfy the debt."

» MORE: Debt avalanche method: pros and cons

Bottom line

Unlike fictional zombies, zombie debt can be a very real threat to financial security. You need to be aware of your financial picture and always question any notification from collections agencies before sending any payment. If someone tries to get you to pay on a time-barred debt or other form of zombie debt, know your rights and don’t allow yourself to be bullied into payment you don’t owe.