Zombie Debt, FDCPA, and Bankruptcy

Zombie debt is debt that never dies.

zombie debt
Zombie Debt Collector

What keeps zombie debt alive?

The multi-billion dollar debt buying industry.

We live in an age of core competence and outsourcing.

So, VISA and Mastercard and other big creditors make minimal efforts to collect overdue accounts, and then, sell them.

For pennies on the dollar, of course.

Why Zombie Debt?

Now, these accounts may be past the statute of limitations, may have been discharged in bankruptcy, may be disputed on the grounds of identity theft or something else.

It may actually be “dead” debt.  The buyers don’t care, their business model is to harass/sue whoever they can, without checking if the debt is real or not.

Hence, zombie debt, debt that never dies.

Companies that buy delinquent debt from the original lenders and then go out and collect it from the borrowers are becoming a fast-growing segment of the multibillion-dollar debt collection industry. (from Reuters story linked to above)

Zombie Debt and the FDCPA

The FDCPA (Fair Debt Collection Practices Act) is 40 years old.  It applies to collectors of debts, prohibiting all sorts of conduct.  It has also been held to apply to entities which own a debt, that is, debt buyers, IF the debt were already in default when purchased.

Zombie debt collectors like Santander claim they are not subject to the FDCPA, even if they acquired the account when it was in default.  Their position is that the act was enacted to regulate third party debt collectors, entities like collection agencies, who are working for the actual debt owner.

The U.S. Congress enacted the debt collection law in 1977 to prohibit collectors from using abusive, unfair or deceptive practices to recoup money.

The current case hinges on the definition of “creditor” and “debt collector” and whether a company that buys debt should be treated as a creditor and therefore not subject to the law.

Zombie Debt and Bankruptcy

It is a violation of the FDCPA to sue on a debt after the statute of limitations has expired.

Plenty of zombie debt ends up in bankruptcy court.

There, the zombie debt buyer files a proof of claim, hoping that the Chapter 7 bankruptcy trustee will collect something for creditors, or, in Chapter 13 bankruptcy, so that they collect whatever percentage the unsecured creditors are getting.

So, what if zombie debt buyer files a proof of claim for a zombie debt that died as being after the statutes of limitations?

Courts are split on that issue.

I do not see how a court can hold that filing a claim to get paid on a debt, is not an attempt to collect on a debt that is past the statute of limitations.

But some have.

So, if you need someone to slay a zombie debt, you know who to call.

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