As a nation we must either love or at least be fascinated by the idea of zombies. As evidence of this two of the most popular programs on television are The Walking Dead and Z Nation. There have also been Shaun Of The Dead, Zombieland, 28 Days Later and Army of Darkness. These are fun films and programs because they allow us to experience horror vicariously without having to risk our own lives. However, there is a form of zombie that can be an actual horror. They are called zombie debts because they aren’t completely dead even if you’ve had a bankruptcy.
How can this be?
Surely this can’t be true. Once you’ve gone through a bankruptcy and had your unsecured debts such as credit card debts and personal loans discharged you should be free of them, right? Well, maybe not. Tens of thousands of us who went through bankruptcy are still being haunted by zombie debts or debts that weren’t killed by bankruptcies – and sometimes as long as a decade after the bankruptcy. This is because some of the country’s largest banks are ignoring bankruptcy court discharges or at least that’s what federal and state officials suspect. Although debts that have been discharged in bankruptcy are supposed to be void, some banks are apparently keeping them alive and eventually forcing people to make payments on debts that they do not legally owe.
Shaking the foundations of bankruptcy
You may not be aware of this but our right to declare bankruptcy is guaranteed in the U.S. Constitution. Our Founding Founders felt that everyone should be able to get a fresh start by having their debts discharged and wrote this into the Constitution. However, there are some banks that are shaking the foundations of bankruptcy by refusing to correct their credit reports to reflect the fact that a debt or debts were discharged through bankruptcy. Where the pressure comes in is that if you know that you can get a clean credit report without paying the debt, you are likely to do so.
The problem is that there can be a mutually beneficial arrangement between banks and debt buyers. When banks receive payment from borrowers they send these along to the debt buyers. This makes these buyers more willing to buy portfolios of soured debts – including those that will wind up voided in bankruptcy.
A heavy toll
A bankruptcy takes a heavy toll on a person. The court will examine every bank account, possession and bill with a fine-tooth comb before they issue the discharge injunction, which is what eliminates certain debts and grants a fresh start. However, all this brain damage is worthless when lenders ignore the fact that your debts have been discharged.
Why this happens
When a borrower has a debt discharged in bankruptcy, the creditor is required to update its credit reports to show that the debt is no longer owed, which theoretically removes any notion of “past due” or “charged off.” However, some banks routinely don’t do this. What the bankruptcy judges suspect is that these are not clerical errors because the banks are refusing to fix the mistakes unless the borrowers pay the “zombie” or discharged debts. And many do end up paying. This is because they have so much at risk as a tainted credit report, which shows they still owe a debt, can cost them a house, a new loan or a job. Other people make payments on these debts they no longer legally owe simply because they don’t understand the practice is illegal. Or they can’t afford to hire a lawyer to litigate the matter.
A shady practice
Debts that have been written off are called stale debts, which can even include those that have been voided through bankruptcy. The motivation for this is that when a bank sells off debts to a debt buyer, it usually can keep any payments it received 18 months or later after the sale. In other words if it’s two or three years after your bankruptcy and the bank refuses to remove the debt unless you pay up it can then keep any payments you make. However, before that it must send any payments it receives to the debt buyer. This is why some banks sell off debts to debt buyers – at deeply discounted prices – that are long overdue and that eventually end up being voided in bankruptcy after the sale.
The companies that buy these debts are generally called debt scavengers as they scavenge for debts. Scavengers often pay less than a cent for every dollar of debt, which means they can make money if they collect only a small fraction of the debt.
In addition to trying to collect debts that have been discharged through a bankruptcy, they also may try to collect debts where the statute of limitations has run or a debt that isn’t really yours. This could be the debt of a person with a name similar to yours, the result of a mistake made by a creditor or even due to identity theft.
What you should do
If you find that you are being haunted by a “zombie debt, the first thing to do is never acknowledge that it’s your debt, which means not saying anything that would even infer that you understand it’s your debt. Second, be sure to watch out for the tricks played by scavenger collection agencies. For example for example, the collector might try a bait and switch credit card where they tack the old debt on to a new card that has offers great benefits.
Third, ask for everything in writing as proof that the debt is really yours. This could be the credit card agreement you originally signed plus your account history. If the collector cannot prove the debt is yours, it doesn’t have the right to take any action against you
Failing this you will need to write a letter to the collection agency where you explain that you are not responsible for the debt, that you don’t knowledge it and you demand that the collection agency stop harassing you or you will take legal action. And make sure you send it Certified and Return Receipt Requested.
However, if your credit report is being held hostage because the bank refuses to remove the debt until you pay up you really only have three choices. You can pay off the debt, hire an attorney to litigate the matter or simply ignore the problem and move on. What this really boils down to is that if you can’t afford to hire a lawyer and if you need to have the debt removed from your credit report, you will have to pay off the debt – like it or not.
Think before you file
If you’re facing an insurmountable pile of debts the idea of filing for bankruptcy can be very appealing. Just think. In just a few months you could have all or most of your unsecured debts discharged and be completely debt free. Woo-hoo! But it’s important to think before you act. Not even a bankruptcy can get rid of all debts. For example, it can do nothing about secured debt such as a home loan or auto loan. Unsecured debts like alimony, child support, spousal support and student loan debts also can’t be discharged through chapter 7 bankruptcies. So before you file, sit down and make a list of all your debts and divide them into two columns – those that can be discharged and those that can’t. Add up the two columns and this should give you a good idea as too much help you would get by filing for bankruptcy. And don’t forget that some of those debts could turn into “zombies” and come back to haunt you years from now.