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Zombie Debts Haunting Borrowers

A recent Newsday article alerted readers to the phenomenon of "zombie debt," which has been around since the 1990s, but has apparently become more common in recent years. According to the article, zombie debt is exactly what it sounds like - old debt that's been brought back to life. And, for un-savvy consumers, it can be just as frightening as a good zombie film.

In the 1990s, credit card companies reportedly began focusing on maximizing profits from interest payments, which meant targeting customers who were known to run a monthly balance on their cards. Offering these customers multiple cards improved the companies' chances of collecting more interest from them.

In an effort to improve quarterly earnings, card issuers began selling defaulted accounts to debt collectors, who could then collect on the debt. Some debts are apparently sold again and again (totaling $100 billion in annual sales), until they go for pennies on the dollar. Those able to collect on these older, less expensive debts stand to make huge profits.

Up to a point, this practice is legal, but some unsuspecting consumers may find themselves paying debts they don't actually owe.

After six years of an account going into default, collectors are no longer permitted to sue for collection. After seven years, the debt can no longer show up on a consumer's credit report. And, of course, debts discharged in bankruptcy are never legally collectable.

But collectors are permitted to make collection efforts indefinitely (assuming no bankruptcy discharge), as long as they don't threaten to sue or report a debt to a credit agency. Naturally, though, some collectors don't play by the rules.

Because bankruptcies are removed from credit reports after 10 years, it's possible that a debt collector would attempt to collect on discharged debts without knowing that a bankruptcy ever occurred. But some collectors simply don't care, and rely on threats and/or consumer ignorance to make sure they get their money.

Consumers should know that those with healthy finances are likely to be targeted by zombie debt collectors, since they're more likely to have the means to pay.

Be aware that unscrupulous collectors will attempt to collect debts discharged in bankruptcy as well as those still legally owed. An article published in BusinessWeek in November 2007 explores this in more detail.

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