What can you do when zombie debt rears its head?
Louis Denicola/Credit Karma

31 October 2016

Imagine you're home alone on a chilly fall night. Suddenly, the phone rings. You pick it up, and a voice on the other end of the line asks for you by name -- and then asks for your money.

Zombie debt reaching toward your pocket can be scarier than the haunted house down the block. But what exactly is a zombie debt... and how can you deal with it?

What is zombie debt?

A zombie debt could be a debt that you don't owe but are being asked to pay. Here are situations where this might happen:

  •     Your debt was already discharged in bankruptcy.
  •     Your debt was settled with your creditor.
  •     There was a clerical error.
  •     Someone stole your identity.

In some cases, a zombie debt is a legitimate debt, but it's so old that the debt collector can't force you to pay.

A zombie debt's life, death and reanimation
A creditor may send late-payment notices to you if you fall behind on your payments.

If the debt continues to go unpaid, your account could be sent to either an internal or a third-party debt collection agency that will try to track you down and get you to pay.
Eventually, the creditor might decide to sell the debt, perhaps as part of a large sale with many past-due accounts, for a percentage of the amount owed and write off the remainder as a loss.

After trying to collect the debt, the buyer might resell the accounts it has trouble with for an even steeper discount. As the process continues, the remaining accounts might be sold for just pennies on the dollar.

So what does this mean for you?
If you fall behind on payments, your debt could wind up being sold and bought several times over. Years could go by without a collection call, and then a new collection agency buys your debt and then your phone starts to ring. Start by verifying the debt.

When a debt collector contacts you, don't share or confirm any of your personal information. The first thing you should do is ask the collector for his or her name and the company's name and address.

If the collector doesn't respond, that's a big red flag that the call could be a scam. The Federal Trade Commission (FTC) warns about fake debt collectors trying to collect money that was never owed.

By law, the collector must tell you by phone or send a letter within five days of first contact detailing:

  •     The amount of the debt.
  •     The original creditor's name.
  •     Your right to dispute or verify the debt.

Once you have the company's name and address, Angela Trayer, a financial wellness expert at nonprofit financial counseling education organization GreenPath, recommends hanging up and sending a dispute letter via certified mail with a return-receipt request.

The Consumer Financial Protection Bureau (CFPB) has several template letters you can use if the original creditor no longer owns your debt.

If you send the dispute letter within 30 days of receiving the collector's information, the company is generally not allowed make any collection attempts until you receive written proof of the debt and the company's authority to collect the money.

Disputing the debt may be enough to free you from fraudulent collection attempts, and help you clear up mistakes and kill the zombie debt.

And if the debt is yours, the verified information can help you figure out what to do next.

You can also check your credit reports for the debt, although it could be a legitimate debt even if it's not on your reports.

This is because debt collectors generally aren't required to report collection accounts to the credit bureaus.

You can find free copies of your TransUnion and Equifax credit reports on Credit Karma and once a year, you can view your credit reports for free from all three bureaus at annualcreditreport.com.

Keep in mind that just because the debt is real and the company is legitimate doesn't mean it's your debt. Trayer says sometimes a clerical error can tie a debt to you when it's not yours, or you might have been a victim of identity theft.

Be cautious with old debts that may be outside the statute of limitations.

Debt collectors only have a certain number of years during which they can sue you to collect on the debt. The length of time is known as the statute of limitations, and it can depend on the type of debt and state laws.

For example, the FTC writes that the statute of limitations on credit card debt is often three to six years, but in some states it could be as long as 15 years.

An attorney can help you determine whether the debt is outside the statute of limitations.

After the statute of limitations is up, your debt is usually considered "time-barred debt," and collectors may not be able to collect. That doesn't necessarily mean you don't owe the debt, nor does it necessarily prohibit collection agencies from attempting to collect the debt. However, the creditor might not be able to force you to pay.

If you're contacted about a time-barred debt, one option is to send the collector a letter demanding that they stop contacting you, which they are required to abide by in most circumstances.

If a debt collector sues you for a time-barred debt, ignoring the lawsuit is usually a bad idea. Unless you or your attorney respond and show proof that the debt is time-barred, a court may rule in the collector's favor.

Finally, be careful how you respond if a collection agency contacts you about a debt. Whether or not its time-barred, you could reset a debt's statute of limitations by making a payment or saying you're going to make a payment. Remember, the statute of limitations isn't connected to your credit report. The statute of limitations is sometimes confused with the length of time an account remains on your credit reports.

The statute of limitations is the state-imposed period of time during which a creditor or collection agency can sue you for the debt. The period often starts when you miss a payment, which might coincide with a negative mark on your credit report, but the statute of limitations isn't dependent the information in your credit report.
Know what collectors can't do.

Some debt collection agencies can have a reputation for using aggressive tactics to track down debtors and ask for payment.

"I've seen fake arrest warrants and threats of publishing the debt in the newspaper," says Bryant Dunivan Jr., a foreclosure and consumer protection attorney with the Law Offices of Michael J. Owen in Brandon, Florida.

But the Fair Debt Collection Practices Act and other federal and state laws limit what debt collection companies can and can't do.

The FTC has a list of some off-limit practices, including harassing you or making false statements. If a collection agency does something you believe is not permitted by law, you can file a complaint with your state's attorney general, the FTC or the CFPB, and you may want to consult with a lawyer about other legal options.

Bottom line
Zombie debts can come back to haunt you, but there are steps you can take to deal with them for good.