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What It Is and How to Deal with Collectors

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If you’ve had debt in the past you couldn’t pay, some of those accounts may have been written off as “uncollectable.” In other words, the company may have stopped trying to collect because they were unable to get you to pay or to reach you at all.

However, in recent years, a new breed of debt collector has started to buy these old debts and attempt to collect on them all over again.

Given their propensity to rise from the grave, these debts are known as “zombie debt.”

What Is Zombie Debt?

When a person can’t or won’t pay a debt, the lender has a number of different methods by which to get back their money. These usually include harassing phone calls, letters, and possibly even wage garnishment.

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In many situations, however, the debtor has moved away and can’t be found, or simply has no money. After a while, it is not cost-effective for the lender to continue collection attempts and the accounts are thus “charged off” and taken off the lender’s books. 

Most lenders will stop trying to collect entirely once the debt is three to six years old. At that point it has passed the statute of limitations, and the debtor is no longer legally required to pay it. The statute of limitations varies by state and type of debt.

Those old debts still have some value, however. While the original lender may no longer find it worth their while to try to collect, other companies do. Uncollectable debts are often sold for a small percentage of their original face value to other debt collection companies, even if the statute of limitations on whether the debt can be collected has passed.

Since the zombie debt collection company pays so little for the debts they acquire, getting paid on even a fraction of the loans makes for a profitable business model. Companies that buy uncollectable debts can pay as little as 4% of the face value of the loan. That is, if the original debt was $1,000, the new creditor will pay about $40 for it. If this company can get just one person to repay a $1,000 debt in full, that covers costs to purchase 25 similar loans.

Most of the time, however, such a debt is years old. The debtor won’t remember it, and it might not even show up on their credit report anymore. Or, perhaps, the debtor declared bankruptcy, so the debt has been legally wiped out.

Regardless, if the debt is old enough, the debtor may not be legally required to settle it. Most states have a statute of limitations on how long a lender can attempt to collect on a debt. While the debt is still considered valid even after the statute of limitations has passed, you aren’t legally required to pay it.

Follow the steps below to understand your rights and protect yourself if someone tries to collect a zombie debt from you.

  1. Don’t spend any time with someone on the phone. If they call, just ask for the debt collection company’s address and instead send them a letter as instructed below.
  2. Never acknowledge that the debt is yours — even if it is. Doing this could allow them to reset the statute of limitations and make you legally liable for the debt once again.If they send you a letter, keep it.
  3. Send a certified letter to the debt collection company within 30 days of their contact. Ask them for a validation notice to prove that the debt is yours and is still collectable. The Consumer Financial Protection Bureau (CFPB) has a sample letter you can use (the second on the page). Keep a copy of your letter.
  4. Don’t contact or talk to the collector again until you receive the validation letter. It should include the amount of the debt, the name of the creditor, and how to dispute the debt if it isn’t yours. The Fair Debt Collection Practices Act (FDCPA) requires the debt collection agency to provide you with all of this information.

Once you receive the information about the debt, you’ll be able to determine if the statute of limitations has passed or if it’s even your debt at all. In some cases, zombie debt can be the result of identity theft, computer error, or a fraudulent attempt to get money from you for a debt that doesn’t exist.

In other cases, the debt is yours but has already been settled. This includes debts you’ve paid in full and debts that were discharged in bankruptcy.

If the letter shows that this debt is not valid for any of these reasons, send the debt collection agency another letter. In this letter, inform them that you dispute the debt and instruct them not to contact you anymore about it. Use the first or third sample letter on the CFPB site as a model.

Should I Pay This Debt?

There are few scenarios in which you will benefit by paying a valid debt beyond the statute of limitations. Zombie debt is so cheap precisely because it is uncollectible. The collection agency profits from the debtors they can convince to pay, even if those debtors aren’t legally required to pay.

Many debt collection agencies motivate debtors to pay by using guilt, fear, or the debtor’s lack of knowledge. But if the debt is beyond the statute of limitations, you are not required to pay anything.

Sometimes, the debt collection agency may urge you to make just a small payment to show “good faith.” But this can be the absolute worst thing to do. Paying any amount on the debt can restart the statute of limitations and make you liable for the entire debt.

In other words, it is no longer zombie debt and is just as valid as the debt you owe on your current credit cards or mortgage. Because of this, the debt becomes legally collectible, and the collector will have greater incentive to pursue you. 

The reactivated debt can reappear on your credit report as well. Even if you pay off the zombie debt completely, it can seriously hurt your credit score. It will revive a bad debt and add late payments to your report.

The only time paying a zombie debt can help you is if it’s past the statute of limitations, but still on your credit report. Unpaid debt can stay on your credit report for seven and a half years from the time it went to collections. In this case, paying it off can improve your credit.

However, this only helps you if you can pay the entire debt. This can mean paying it in full, making a payment plan, or getting the debt collector to settle the debt for less than you owe.

If you want to pay off the debt, make sure you get any agreement in writing first.

What Protections Does the Fair Debt Collections Practices Act Provide?

The Act provides several important measures to protect consumers from being harassed when companies attempt to collect debts. It also lays out strict rules on debt collection practices. Under the law, debt collectors cannot:

  1. Lie to you in any way about the debt, or about what will happen to you if you don’t pay it.
  2. Pass on false information about the debt, including to credit reporting agencies.
  3. Harass you by threatening you with violence, using obscene or profane language, calling you several times in a row, or calling you during the night or early morning.
  4. Tell your relatives, your workplace, or anyone else about your debt. 
  5. Continue to contact you after you’ve sent them a letter ordering them to stop.

Final Word

Zombie debt is a profitable business, so you can count on these debts “rising from the grave.” However, you have legal rights that allow you to verify the debt and stop the harassment. 

Remember, you are generally better off not paying the debt if it is too old to legally pursue. Find out what the statute of limitations is in your state and see if the debt shows up on a current credit report.

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