Zombie Debt and Tricks for Consumers To Bring Debts Back

The bureau estimates millions of consumers a year are contacted about zombie debts that are no longer legally enforceable. Critics say a new rule doesn’t go far enough to end the confusion. A proposal from the Consumer Financial Protection Bureau could spark a fight about what should happen to consumers’ old debt.

Debt collectors lose the right in many states to sue consumers after their debt reaches its statute of limitations, typically three or more years. But there’s a loophole: If the consumer makes a payment or acknowledges the debt in writing, that can be used to try to revive the life of the debt, creating what some consumer advocates call “zombie debt.”

The CFPB estimates millions of consumers are contacted about such time-barred debt every year. In a new proposal, the bureau says debt collectors could continue to try to collect on those old debts but would have to tell consumers upfront they are outside their statutes of limitations and the consumer can no longer be sued to recoup the money.

The collection of a time-barred debt “can pose consumer protection concerns,” the CFPB says in its most recent proposal. Reached by a debt collector, a consumer may prioritize that old debt, leaving them with “less money to pay another debt.”

The proposal is part of a broad revision of debt collection rules the CFPB implemented last year that include allowing debt collectors to call consumers seven times a week and to send unlimited texts and emails. It would also prohibit companies from suing to collect on a debt they knew or should have known is past their statutes of limitations.

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Those proposed rules, which haven’t been finalized, have received more than 14,000 public comments, many of which raised the issue of zombie debt. One Oregon man wrote that he had settled a 10-year-old medical bill he received for an MRI his son needed after a fall during a gymnastics tournament but was still getting phone calls.

But consumer advocates say the CFPB proposals don’t go far enough in protecting consumers.

It is “disappointing,” said Linda Jun, senior policy counsel for Americans for Financial Reform. The CFPB should bar the collection of debts that have passed their statute of limitations altogether, he said.

“The whole point of the statute of limitations is that the government has decided that the debt is no longer collectible,” Jun said. “If you can’t be sued on it, why are you getting mail on it?”

Debt collectors say blocking the industry from attempting to collect on the time-barred debt would harm the credit markets. “There is a large gap between not being able to sue on a debt and not being able to collect on it at all. That is a bridge too far for us,” said Mark Neeb, chief executive of ACA International, a large industry group.

Consumer advocates and financial experts say the fate of these old debts is becoming more pressing as the country’s consumer debt reaches record levels — more than $4 trillion this year — and the industry is able to bring in “tens of billions of dollars” from debt past the statute of limitations every year, according to a report by the Receivables Management Association International.

Some people may want to pay off a debt after it has passed its statute of limitations to repair their credit score or out of a sense of obligation, industry officials say.

Zombie debt: How collectors trick consumers into reviving dead debts

Consumers would benefit from better understanding their rights, Neeb said of the CFPB’s latest proposal. But given the statute of limitations can vary depending on the state, type of debt, or even where a purchase is made, forcing debt collectors to make detailed disclosures could be complicated, he said.

“It puts debt collectors in a position of giving legal advice to consumers,” Neeb said. “And it’s pretty complicated.”

(Matt Rourke/AP)

By Renae Merle