What Is Zombie Debt and What Can You Do if It Comes Back to Haunt You?

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The Consumer Finance Protection Bureau (CFPB) recommends keeping a debt-to-income ratio of 43% or lower. Unfortunately, many Americans aren’t able to maintain that rate. This can make financial surprises like zombie debt into a real struggle to manage.

What Is Zombie Debt?

Zombie debt is old debt that has fallen off your credit report. So, it no longer impacts your credit score. Typically, this debt is seven years old or older. Sometimes, you’ve already settled this debt with those you owe. In other situations, the debt was supposed to be cleared in bankruptcy. Often, zombie debts are past the statute of limitations.

In some cases, zombie debt isn’t even yours. Fraudulent and erroneous zombie debt can also causes serious problems.

Unscrupulous Agencies Resurrect Debts

Debt collections agencies purchase old debts. Because agencies buy the past-due debts for much less than they’re worth, they can make profit if they are actually able to collect on it. Collectors win even if debtors don’t pay in full.

Information can deteriorate as debts are re-sold. So, an agency might try to collect a debt that has already been repaid. Some agencies even employ practices with dubious legality. This includes pursuing debtors beyond the legal limitations of their debt and gambling on the probability that enough people will pay up anyway just to stop the harassment.

Common Types of Zombie Debt

A collections agent might resurrect any type of debt. But, some types of zombie debt are more common than others.

Some are common because they have no legal expiration while others stem from poor data maintenance. Collectors have a tendency to try to collect on zombie debts in five categories.

Student Loan Zombie Debt

Student loans are a significant source of zombie debt. That’s because there’s no statute of limitations on federal student loans.

And, unscrupulous lenders target teens. Some high-interest loan lenders target incoming college freshmen. These dealers bank on typical eighteen-year-olds ignorance of reasonable loan practices.

The National Consumer Law Center reports that over 400,000 former students aren’t making a dent in their loans. Instead, they’re simply paying interest to debt servicers.

Credit Card Zombie Debt

Credit card debt is fairly common. This is part of why it’s a huge portion of zombie debt. According to a CNBC study from 2020, nearly half of Americans owe some form of credit card debt.

Legally, unpaid credit card debt drops off your credit report after seven years. But collections agencies that buy zombie debt may pursue debtors beyond that date.

Erroneous Zombie Debt

Erroneous zombie debt is frustrating. This debt isn’t even yours.

When collections agencies purchase debt, data gets disorganized in the transfer. So, the collections agency wrongly labels someone else’s debt as yours.

Clumsy data entry and typos can cause these errors. Unfortunately, so can more malicious actions. At least one expose discovered a collections agent intentionally misattributing debt to a higher-income debtor.

Fraudulent Zombie Debt

The collections agency isn’t the only source of fraud. Identity impersonators and credit card thieves can accrue debt in your name.

Fraudulent debt can be hard to identify. By the time you discover a thief has charged your card, Mastercard might have already sold off your debt.

Adjusting records to account for theft takes time. This is specifically true if you must obtain a new ID or Social Security Number.

Zombie Debt Against Inherited Assets

You cannot inherit a deceased person’s debts, but an individual’s estate may be liable for debts.

If you inherit assets, some debts will be legally cleared. Others will expire.

But collections agencies may try to force an asset sale to pay off debts. If you discover zombie debt against an asset you inherit, move cautiously.

How to Deal with Zombie Debt Collectors

Journalists have reported cases of debt collectors who go to extreme lengths. Fortunately, you don’t have to put up with harassment. Instead, take these five steps to deal with debt collectors.

1. Send Certified Letter

Before you do anything else, prepare. Ultimately, you’ll need to either dispute your debt or seek resolution.

To do either, you’ll need to send a letter. You have the right to send a certified letter within thirty days.

The letter can request more information. Or, it can dispute the debt. Either way, it’s a key step to mitigating the debt collection process.

Get the debt collections agency’s address. Don’t speak to any agents on the phone. You may block the collections agency’s number.

2. Don’t Make Payments

Do not make any payments. You may not owe anything at all, but making a single payment can trigger the full collections process.

This process can compel the IRS to demand debt taxes. If it does, it sends you a 1099-C form which adds an unnecessary layer to the process of filing taxes.

Making a payment can also reset the clock on your debt, taking the previous expiration of the statute of limitations out of play.

You’ll need that statute. It’s useful if you want to dispute debt later when dealing with zombie debt.

3. Search Your Records

Search through your personal financial records. Look for any records of payment or settlement. It helps to have paperwork that invalidates the debt claim.

In cases of fraud, look for evidence of fraud. Highlight purchases that couldn’t possibly be yours. If you’ve previously reported fraud, gather your copies of those files.

4. Requisition Debt Validation Letter

The next step is to get a debt validation letter. The collections agency must legally provide a validation letter upon request. And, a debt validation letter is protected under FOIA.

The debt validation letter drives your next steps. The letter includes:

  • The amount you allegedly owe
  • The original creditor’s name
  • The collection agency’s name
  • A formal statement that the debt is assumed valid
  • A formal statement agreeing to provide requested information

This information helps you parse the zombie debt’s nature. It helps you determine whether the debt is legally yours.

5. Research Time-Barred Debt

Finally, research the statute of limitations for the debt. Learn if the debt is time-barred. And, discover if any other legal protections come into play.

You can research federal, state, and local laws online. There are free, digital public law libraries. These sites have a “.gov” URL.

You can also seek non-profit legal aid. Legal aid groups and debt counseling non-profits give pro-bono advice by phone.

Many debtors are eligible for a free thirty-minute consultation. Some organizations offer free debt analysis.

Three Resolution Options

Once you’ve done your research, you have some decisions to make. The best decision differs depending on your circumstance.

Dispute the debt if the collections claim is fraudulent. Disputes are also valid when you no longer legally owe payments.

Otherwise, you’ll have to choose another path. Repayment and relief are both useful resolutions. Which one works for you?

1. Dispute Debt With Certified Letter

A letter of dispute refutes your legal obligation to the debt. These ensure you include all relevant information.

You can also request more information. Do this if you can’t yet judge whether a dispute is valid.

Your right to dispute debt is protected. Debtors have rights under the Fair Debt Collection Practices Act. This Act defines collection harassment. And, it limits the actions a collection agency can take.

Make sure to report any identity theft to the FTC. It’s wise to issue fraud alerts on credit reports. You should also notify relevant departments to replace stolen identification.

You can enforce your rights in court. The collections agency may not harass you. If it does, you may sue the agency.

2. Pay Off Debt

There are strategies to pay off debt. If you legitimately owe money, get the debt payment agreement in writing.

Try to negotiate for a lower settlement, either yourself or through an experienced debt settlement firm. Then, create a payment plan.

Make sure any settlement agreement is recorded in writing. Get copies of the agreement. Distribute records to all relevant parties, including credit rating agencies.

3. Pursue Debt Relief

It’s often wise to pursue debt relief. Debt relief legally cancels some or all of your debt.

Specific routes to debt relief vary by circumstance. For example, Chapter 7 bankruptcy can discharge your medical debt. Whereas you’ll typically need both an adversary proceeding and bankruptcy to cancel student loan debt.

Debt relief may entail credit counseling. Or, it can facilitate a debt settlement. Chapter 7 and Chapter 13 bankruptcy can grant debt relief.

Reliable Debt Relief Services

At New Era Debt Solutions, we empower you to become debt-free. Whether you’re navigating questions like, “What is zombie debt?” or “Do I qualify for debt reduction?” our debt specialists are ready to help.

New Era has helped hundreds of people just like you. Call us today for a free assessment. We’re happy to answer any questions you have.