What is zombie debt and should I be concerned?

Zombie debt is debt that you’re no longer legally obligated to pay. This article specifically addresses debt that falls outside the statute of limitations, meaning that the creditor has waited too long to act and can no longer sue to collect that debt. You may also hear the term used to describe other types of debt that you’re no longer required to pay, such as debt that has been discharged in bankruptcy.

Because collection agencies and debt buyers don’t always act in good faith, it’s important to learn how to recognize zombie debt and understand how collection attempts work. Innocent mistakes may put you back on the hook for debt that had already expired.

How common is zombie debt? 

Zombie debt is debt that’s so old the statute of limitations on that debt has run. The statute of limitations for debt collection differs from state to state. In most states, the limitation period is between three and six years. In a few states, it’s much longer. Once that time expires, the lender can no longer sue you to collect on the debt. Neither can a debt collection agency or a debt buyer. 

That doesn’t necessarily mean that you’ll stop receiving calls and collection notices. Some of these collection efforts come from original creditors. But most come from the thriving debt buying industry. Debt buyers are companies that purchase delinquent debt from creditors and other debt buyers. They usually pay pennies on the dollar, which means they can afford to settle the debt cheaply and still make money. 

If they’re not having any luck collecting, they may sell the debt to another debt buyer. Some debts change hands several times. That means you may get calls and collection notices from one unfamiliar company after another.

Not all debt that debt buyers purchase is expired, but it often is. According to a 2013 study from the Federal Trade Commission (FTC), 25% of debt purchased from an original creditor was more than three years old. That’s outside the statute of limitations in several states. Debt purchased from other debt buyers was even older: 60% was more than three years old, and 30% was more than six years old. The statute of limitations in at least 20 U.S. states is six years or less. 

If a debt collector can’t sue you for zombie debt, what’s the problem? 

Why do debt buyers purchase debt outside the statute of limitations? And why should you care? 

The short answer is that debt buyers collect a lot of “uncollectible” debt. In most states, debt collectors can continue many collection efforts even when the debt is outside the statute of limitations. In fact, these creditors can still file a lawsuit against you. It’s up to you to raise the statute of limitations and get the case dismissed. A lot of people who get sued by debt collectors don’t show up in court. So, debt buyers can sometimes win default judgments even though the debt is outside the statute of limitations. A few states make it illegal to file a debt collection suit outside the statute of limitations.

It’s a violation of the federal Fair Debt Collection Practices Act (FDCPA) for a debt buyer to misrepresent the legal status of a debt. But some collectors count on the fact that most people don’t understand their rights.

Debt Collectors Often Try to Trick People into Reviving Zombie Debts

Some people pay old debt voluntarily, out of a sense of obligation or to clean up their credit reports. Unfortunately, zombie debt is more often collected through shady debt buyer tactics.

The most significant pitfall involves a “good faith” payment. The statute of limitations runs from the date of the last activity on your account. Usually, that’s when you made the last payment. If a debt is outside the statute of limitations and the debt collector can get you to pay even $1, the clock restarts. That means that the debt collector can sue on a debt that was outside the statute of limitations before you made the payment. 

Usually, debt collectors trick or pressure people into making this payment. Most people find collection calls stressful, and $10 may seem like a small price to pay to end a call. But the debt buyer knows exactly what they’re doing. They’re not interested in the small payment. They’re interested in regaining their leverage by restarting the statute of limitations.

Sometimes their tactics are even more aggressive. For example, this debt buyer filed a lawsuit outside the statute of limitations. Then, they garnished less than $1 from the account holder’s bank account. Unlike most consumers who face debt collection lawsuits, this one either knew her rights or got help. She successfully challenged the suit because the debt was too old. Then, the debt buyer filed a new lawsuit, listing the last payment on the account as the tiny garnishment they’d managed to secure in the time-barred lawsuit.

Back in 2015, the Consumer Financial Protection Bureau (CFPB) took action against two of the nation’s largest debt buyers, Encore Capital Group and Portfolio Recovery Services. The CFPB said that the companies had misrepresented their intentions or the status of debt and had sued or threatened to sue on time-barred debts. The companies were required to refund tens of millions of dollars to consumers and pay millions in penalties. Despite this and other enforcement actions by the CFPB and other government agencies, the industry hasn’t cleaned up its act.

Know Your Rights Under the FDCPA

The FDCPA prohibits debt collectors and debt buyers from misrepresenting the legal status of a debt. This means that they can’t trick you into thinking they can still sue you for a debt if they can’t. They also can’t lie about what they plan to do or threaten to take action they can’t legally take. This includes suing you on a debt that’s outside the statute of limitations. 

Debt buyers may also violate the FDCPA in ways that don’t specifically relate to the age of the debt. For instance, it’s a violation to: 

• Use obscene or abusive language

• Call you repeatedly for the purpose of harassment

• Give third parties like your family or employer information about your debt

• Call you at work if you’re not allowed to get personal calls

• Continue to pursue collection of a debt after you’ve requested validation within the time limit

• Claim to be a lawyer if they’re not

• Say or mislead you into believing they are associated with law enforcement or a court

Understanding these rights will help you protect yourself against the debt buyer tactics most commonly used to reactivate old debt. 

Old Debt and Your Credit Report

Most debt can be reported to credit reporting agencies and appear on your credit report for up to seven years. The seven-year period starts when you first miss a payment and don’t begin paying again. If you stopped paying on your credit card account on March 1, 2013, and never made another payment, that entry would drop off your credit report seven years later. If the item wasn’t gone on March 1, 2020, you could request removal.

The credit reporting period works differently than the statute of limitations. You can pay off old credit card debt and other debt without restarting the reporting period. If you make a payment on an account that has aged off your credit report and it reappears, you can dispute the item.

If a debt buyer tries to negotiate by saying that they won’t report the account to the credit bureaus, know what that really means. First, if the debt has been inactive for more than seven years, the debt buyer can’t report it to the credit bureaus. The seven-year period is based on your actions on the account. It doesn’t start over because a new debt buyer purchased the account.

Some debt buyers do report old debts because they know that having a collection account on your credit report can put pressure on you to pay. Fortunately, another federal law, the Federal Credit Reporting Act (FCRA) provides a dispute process for consumers. If the original account is outside the seven-year period, you can dispute the entry and have it removed from your credit report. When an account is removed from your credit report, it is also removed from your credit score calculation.

If the debt is less than seven years old, it is probably still on your credit report. The debt buyer typically has no power to remove items reported by the original creditor.

What should I do if I’m contacted about zombie debt? 

The first and most important thing is not to let the debt buyer bully or confuse you into making a mistake. Ask for information such as: 

• The name of and contact information for the debt buyer

• The original creditor and any other account information available

• What they are showing as the last payment date

Do not agree that you owe the debt. Do not make any payment or payment arrangements, no matter how small. It’s difficult to predict what small action might restart the statute of limitations. 

You may also want to contact an attorney. It’s especially important to talk to a lawyer if the debt is large, you have been sued, or an outdated entry on your credit report is preventing you from securing credit.

Let’s Summarize…

When debt gets too old, a statute of limitations bars collection lawsuits. The statute of limitations is different in every state, so make sure that you know yours. In most states, debt collectors can file a lawsuit outside the statute of limitations. When that happens, you’ll have to answer the complaint or show up in court and tell the judge that the debt is time-barred.

Shady debt buyers will try to trick you into restarting the statute of limitations. Knowing your rights is the first step toward protecting yourself. Never tell a debt buyer that you owe the debt or agree to make any kind of payment before you’re absolutely sure that the debt remains collectable.