One of my students, Darla M., eloquently put, “Your zombie debt information is fascinating. I loved this course and crave to learn more.”
Thank you, Darla, for your wonderful comment and for partaking in my best-selling online course, the Debt-Free Personal Finances! I concur that zombie debt is a little-known yet significant concept. In this show, we will discuss zombie debt, the importance of safe practices against zombie debt collectors, debt statute of limitations, and ways to handle old debts.
What is zombie debt?
Ever faced financial difficulties, made you unable to pay a debt? It is pretty distressing. Or possibly, you know someone struggling with debt for whom this show might be beneficial.
Dealing with overdue accounts can be stressful, involving ruthless debt collectors and dropping credit scores. Whether you wish to cleanse your credit reports of negative marks or deal with resurrected ancient debts (known as zombie or phantom debts), it’s vital to understand your rights and your options.
How old debt influences your credit history
Your credit history is significantly affected by old debts. The credit bureaus (Experian, Equifax, TransUnion) manage your credit files for a specific period. Your positive, on-time payments stick around for ten years.
However, negative records like late payments or accounts surrendered to collections last for seven years. But remember, certain types of bankruptcies may stay on your records for up to ten years.
A prevalent misbelief regarding old debts is that paying them off or settling improves your credit scores instantly. However, the reality is different; every old debt you’ve defaulted on stays on your credit report for seven years.
Negative information on your credit scores from old accounts does damage your credit scores. Yet, they become less devastating as they age. On-time payments and new, positive data help repair damaged credit.
Find out why maintaining high credit scores improves your financial life, how your scores stack up against the average, and nine tips for building excellent credit. Listen in this player as you read:
What is the statute of limitations on debt?
The statute of limitations is a law that provides creditors a deadline to sue for unpaid debts. The statute varies based on your location, the type of debt, and your agreement with the creditor.
For example, the limitation term for credit card debt is three years in some states and ten in others. However, debts like income taxes and federal student loans do not expire—you’re always liable.
So, even if a delinquent debt has been dropped from your credit history after seven years, the creditor still might legally sue you. Note, credit reports and statutes of limitations are separate entities and are often confused.
Also, even if the deadline for a creditor to sue you has passed, they can still contact you to collect overdue money indefinitely!
In short, the statute of limitations sets a deadline for creditors to take action, but it doesn’t erase the debt. Some actions can restart a debt’s statute of limitations, known as ‘re-aging’ an old debt. Debt collectors employ strategies to trick you into taking such actions.
For example, some states reset the limitations clock whenever you act on an old debt. The act could be as simple as recognizing that an old debt is yours, promising to make a payment, or agreeing to a repayment plan.
What’s the law around debt collectors? Listen to more on that in this player below:
How to shield yourself against zombie debt collectors
Zombie debt collectors buy old debts at a fraction of their worth in hopes of making a profit. These might even be the ones already settled or discharged in bankruptcy and could have already been dropped from your credit reports.
To protect yourself against harmful zombie debt collectors, watch out for these tactics:
- Harassing you, an illegal activity.
- Misrepresenting their company, they cannot pretend to be a lawyer or litigation firm.
- Lying about the amount you owe or threatening you with jail time.
- Threatening a lawsuit which if your debt’s statute has expired, is illegal.
- Suing you even if the statute has expired.
- Getting you to pay for someone else’s debt.
If a collector harasses or lies, file a complaint with the Consumer Financial Protection Board. Never share your Social Security number or any confidential information with a collector. If contact ensues over the phone, get the company’s name and address, request communication by mail, then hang up.
Remember to ask for verification of the debt within 35 days of their first contact by mailing a certified letter. They must prove the existence of the debt and their right to collect it.
How can you pay off debt? Laura has 8 strategies in episode 786 of the podcast. Listen in the player below!
Four ways to handle an old debt
Here are four potential strategies:
- Pay off the total amount of debt owed.
- Make payments on your debt. But be aware, it could restart the statute of limitations, reducing your legal protection.
- Settle your debt for less.
- Pay nothing on your debt, but remember, creditors can continue trying to collect money from you indefinitely, even if they can’t sue you.
The way forward depends on your unique life and financial situation. It’s YOU who determines whether you can afford to pay a rightful debt, not me.