Zombie debts are real. If you are not convinced that zombies are real – well this type of zombie is. If you have been living with too much debt in your life, there is a high chance that you might be plagued with this kind of debt in the future. Also known as phantom debts, these are loans or credit accounts in the past that came back to haunt you.
Considering the current debt situation of a lot of people, it is not unlikely that this will happen to a lot of people. According to the report coming out from NewYorkFed.org, the debt balance of American households grew in quarter 2 of 2016. The data revealed that as of June 30, 2016, the debt is already at $12.29 trillion. The majority of this debt is from the mortgage category. This is not surprising since this is the biggest debt that people usually borrow. While it is still below the debt peak in quarter 3 of 2008 ($12.68 trillion), it is not far. If we keep at this pace, it might end up costing us in the long run. The increase from the first to the second quarter of 2016 is $35 billion. If that increase keeps up, we might exceed the peak of debt by the end of this year.
The thing about having too much debt is that it could end up being difficult to pay off. When that happens, they will go into default and the interest rate will continue to pile up. It can destroy your credit report and you might end up abandoning some of your debts.
These are the ones that can go back to haunt you in the future.
What are zombie debts?
Investopedia.com gave an explanation about how zombie debts happen.
When someone defaults on a particular debt or fails to pay it off entirely, these are often charged-off by banks and companies. A debt that is considered charged-off are those that the company has decided will no longer be collected. This is how they record this particular debt as a loss.
In time, these charged off debts are sold to third-party debt collection companies for pennies on the dollar. This is how the debt can be taken off their books.
On the part of debt collectors, they can earn from this transaction if they are able to collect the debt. If they bought a $10,000 debt for $3,000 and they successfully collected even $7,000 from the borrower, then they just earned $4,000 on this phantom debt.
As shady as all of this may sound, this is actually a legal transaction. There is nothing illegal about buying old debts and going after the borrowers for collection. However, you need to be careful about these zombie debts. Although the collector will be very persistent in getting you to pay it, that does not mean you should.
There are three reasons why you should not pay off zombie debts.
If it came from a bankruptcy process. When a debt is discharged from bankruptcy, that means the borrower no longer has to pay it off. The company will charge off this debt and in the future, debt collectors can buy this. Although the debt is something that you borrowed, you are no longer obligated to pay it because of the bankruptcy ruling. Do not worry because the collector cannot take you to court for this.
If it was unauthorized. Sometimes, people do not pay off debt simply because they did not make it in the first place. Identity theft is a real problem in this country – especially since we started opting for cashless transactions. If you had been a victim of identity theft, it is understandable that you do not want to pay this off. If you have proven that this is not your debt, that is okay. But if not, then this is a zombie debt that can haunt you in the future. It is encouraged that you find a way to prove that this is not yours. That way, the collector will have nothing against you – even if they decide to take you to court.
If it is beyond the statute of limitations. When a debt is beyond the statute of limitations, that does not mean you are exempted from paying it off. However, you cannot be taken to court for that debt anymore. Debt collectors will pester you about this debt to make you admit that it is yours. Do not make the admission and do not pay off the debt if it is beyond the statute of limitations. When there you make even a small payment, the statute of limitations will be reset and the collector can now take you to court for the old debt that you owe.
Take note that as long as there are unpaid debts, you will be at risk of being haunted by zombie debts. Even if you think you are debt free after bankruptcy, the discharged debts can still come back to haunt you.
Here is a video from CBS Evening News that discusses the reality of zombie debts in our country.
Important rules when dealing with phantom debts
In case a debt collector calls you and asks you to pay these phantom debts, here are the important reminded that you should consider.
- Ask the collector for a written verification. According to the FTC.gov, the first thing that you need to do when confronted with zombie debts is to verify it. Make sure you do not confirm that the debt is yours – even if you know that it is. Ask the collector to show you a document that proves this debt is yours. If they cannot produce that document or you know that what they showed you is not authenticated, then do not confirm that the debt is yours.
- Check your credit report. It is also important that you check your credit history to see if you were a victim of identity theft. You need to report this to the authorities immediately. Have your credit accounts frozen so nobody can use it without proper identification. This is the best way to keep thieves from stealing more money from you.
- Find out the statute of limitations. In case the debt is yours, check if it is still within the statute of limitations. For instance, if the statute of limitations for credit cards in Texas is 4 years and your last payment was in 2011, then you are already beyond it. That means the creditor can no longer take you to court for this debt. You do not have to pay it off.
- See if you need to file a dispute or settle the debt. If the zombie debts are caused by an error or identity theft, you need to report this and dispute that entry in your credit report. If the debt is really yours and you want to remove it from your records, you may want to consider settling the debt. Talk to the collector and negotiate to pay only a portion of the debt and have the rest forgiven. If they bought the $10,000 debt for $3,000 and you pay them $7,000, that would still mean profit for the collector. They are more likely to settle zombie debts rather than not collecting anything.
When it comes to phantom debts, it is very important that you avoid confirming the debt – especially if you have no plans of paying it. You should also understand your rights. Learn about the Fair Debt Collection Practices Act to know what the collector can or cannot do to you when your debts are involved.
In case the collector sends you any letter, keep it. And if you decide to settle the debt, make sure you get a certification that once they receive the settlement amount, the rest of your debts will be forgiven. The balance may be another zombie debt in the future. Make sure you have the documents on file to protect yourself and prove that you no longer owe this debt.
Common questions about zombie debts
Question: Are zombie debts legal?
Answer: Yes they are legal. But that does not mean you should pay it off immediately. There are cases wherein you are no longer legally bound to pay for a debt.
Question: Is it possible to owe zombie debts?
Answer: Yes it is. If a debt is discharged in bankruptcy or is past the statute of limitations in the state where it was borrowed, you do not have to pay it off. But that does not remove the fact that the debt is yours.
Question: How do debt collectors learn about zombie debts?
Answer: Debt collectors go to companies with charged off debts. They buy these debts for a lower value. They profit from this by coming after the borrower and forcing them to pay it off.
Question: What is the best way to get rid of zombie debts?
Answer: If you owe the debt, the best way to get rid of it is to settle it. This will allow you to reduce the amount you will pay while having the debt marked as settled in your credit report. However, there are cases when you are no longer bound to pay it off. You need to understand your rights – through the Fair Debt Collection Practices Act.
Question: Can I ignore zombie debts?
Answer: Yes you can ignore it – especially if it was already discharged in bankruptcy and if it is past the statute of limitations. As long as you did not confirm it with the collector, you can ask them to cease and desist calling you for the debt.