Discover what zombie debt is, tips to stay safe from terrifying zombie collectors, the statute of limitations on debt, and four ways to handle an old debt.
Discover what zombie debt is, tips to stay safe from terrifying zombie collectors, the statute of limitations on debt, and four ways to handle an old debt.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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One of my students, Darla M., says, "Your zombie debt information is the most intriguing. I loved this course and am dying to learn more on this topic."
Thanks for your terrific comment, Darla, and for being a student of my bestselling online class, Get Out of Debt Fast–Your Proven Plan for Debt-Free Personal Finances! I agree that zombie debt is something most people don't know about or understand. This show will review what zombie debt is, how to stay safe from terrifying zombie debt collectors, the statute of limitations on debt, and four ways to handle an old debt.
Hi, everyone, and thanks for joining me this week! I'm Laura Adams, a personal finance author who’s hosted Money Girl since 2008, with over 42 million downloads. I'm also the founder of The Money Stack, a newsletter and community helping you build your bank account and live rich on your terms. I also work with select brands doing on-camera and
writing work as a financial spokesperson and female money speaker.
As always, you can reach me using my contact page at LauraDAdams.com. That's also where you can learn more about my newsletter, books, and money courses. Got a money question or idea for a show topic? Call 302-364-0308 and leave me a message.
What is zombie debt?
If you've ever experienced a rough patch in your financial life and couldn't pay a debt, you know how upsetting that can be. Or, you may know someone struggling with debt and can recommend this show or give them tips for making critical decisions after listening to this episode.
When you have past-due accounts, getting calls from debt collectors and seeing your credit scores plummet can be highly stressful. So, whether you're ready to clean up bad marks on your credit reports or have an ancient account coming back from the dead to haunt you, known as zombie debt or phantom debt, it's essential to understand your rights and options.
How old debt affects your credit history
When discussing old debt, the first issue to understand is how it affects your credit history. The nationwide credit bureaus (Experian, Equifax, and TransUnion) can keep accounts in your credit file for a certain period. Your accounts with positive, on-time payment information remain in your credit files for ten years.
However, your accounts with negative information, like late payments or being turned over to a collection agency, only stay in your credit files for seven years. Some exceptions, like certain types of bankruptcies, show up in your credit reports for up to ten years.
A common misconception about old debt is that if you pay it in full or settle for less than you owe, it instantly disappears from your credit reports and quickly boosts your credit scores. Whether you pay a portion or the total amount of an old debt, it doesn't go away. As I mentioned, every old debt stays on your credit report for seven years after it became delinquent.
Having old accounts with negative information hurts your credit scores; however, they become less damaging to your credit as they age. In addition, if you make on-time payments, the new, positive data is a powerful way to repair your credit.
RELATED: 9 savvy credit building tips for better finances
What is the statute of limitations on debt?
Now that you understand that old debt typically stays on your credit reports for seven years, let's talk about a different time limit, which is the statute of limitations. The statute of limitations on debt is a law that sets a deadline for when a creditor can sue you for an unpaid debt. It varies depending on the state where you live, the debt you owe, and your agreement with the creditor.
For instance, the statute of limitations on credit card debt in some states is three years, but it can go up to ten years in others. Some debts, such as income taxes and federal student loans, don't have a statute of limitations because you're always on the hook for them.
So, even if it's been seven years since you became delinquent on an old debt and it's now fallen off your credit history, be aware that the creditor may still be legally allowed to sue you. The credit report and statute of limitations are two different things that often get confused.
Also, even if the deadline for a creditor to sue you has passed, that doesn't mean you'll never hear from them again. They can continue trying to collect overdue money from you indefinitely!
In other words, the statute of limitations doesn't wipe away a debt because you still owe the money. The statute of limitations encourages creditors to act sooner than later to recoup their loss. Creditors can contact you and ask you to pay an outstanding debt or offer payment terms, even when they can't sue you.
However, regulations allow specific actions to revive or restart a debt's statute of limitations at day one, known as re-aging an old debt. And believe me, debt collectors have strategies to trick or persuade you to unwittingly take those actions to reset the clock, putting you back at square one so they can sue you for the total amount owed.
For instance, in some states, the statute of limitations clock restarts any time you act on an old debt. The action could be something as simple as acknowledging that an old debt is yours, promising to make a payment, agreeing to a payment plan, or making a payment—no matter how small.
LISTEN ALSO: The law about debt collection harassment
How to protect yourself from zombie debt collectors
Zombie debt collectors can purchase old debts for pennies on the dollar to get something from you and make a profit. As I mentioned, the debts could have already fallen off your credit reports or be time-barred after the statute of limitations expires. Zombie collectors may even collect on debts you have already settled or were discharged in bankruptcy.
Knowing what a debt collector can and can't do is important to protect yourself and avoid being taken advantage of. To stay safe from potentially harmful zombie debt collectors, be aware of the following tactics they may use:
If a debt collector harasses you or lies, you can file a complaint with the Consumer Financial Protection Board. Remember that you don't have to tell a collector anything, no matter how often they call or ask. Remember never to share confidential information with a collector, such as your Social Security number. If you owe a debt, the lender would have the necessary information.
If a collector contacts you by phone, ask for their company name and address, say you will only communicate through the mail, and then hang up. Don't admit you owe a debt, engage in conversation, or debate the issue.
Even speaking with a collector is risky because you could accidentally say something that gives them a leg up or resets your debt's statute of limitations, allowing them to sue you. All communication with a collector should be done through snail mail so you have hard copies.
You have the right to request verification of the debt by sending a certified letter back to the creditor within 35 days after receiving their first letter. They must prove that you owe the debt and they're authorized to collect it.
LISTEN ALSO: 8 debt payoff methods you should know
4 ways to handle an old debt
As you can see, the law regarding past-due accounts is tricky. It's easy to make a wrong move that could hurt your finances. I recommend weighing your options carefully and consulting with an attorney if you have an old debt.
Here are four ways to handle an old debt:
1. Pay off the total amount of debt owed.
Even if the statute of limitations expired on an old debt, you may still decide to pay the total amount. For many, honoring debt is a moral obligation, even after struggling through financial hardship. If the debt hasn't already fallen off your credit report, paying it changes the account status from "unpaid" to "paid," which improves your credit.
2. Make payments on your debt.
If your financial situation has improved and you want to start chipping away on an old debt, remember that it could restart a new statute of limitations period, giving you less legal protection in some states. Again, if it's still on your credit report, having the account shown as "paid" gives your credit a chance to improve.
3. Settle your debt for less.
If you want to pay some of your debt, most collectors are willing to settle for a partial payment. For instance, if you owe $10,000 and could offer to pay $5,000 immediately, that might appeal to the creditor. Always get a settlement offer in writing before you pay any amount. Otherwise, your payment could be considered a partial payment, reviving the statute of limitations in some states.
When you settle a debt still on your credit report, the status changes to "settled" for the remainder of its seven-year history. That indicates the debt was not paid in full, as originally agreed, and will hurt your credit scores. While that's better for your credit than leaving it unpaid, it's not as good as paying it in full.
4. Pay nothing on your debt.
As I previously mentioned, if you don't pay a debt, you still owe it even after the statute of limitations expires, or it falls off your credit reports. Creditors can try to contact you and collect money indefinitely, even if they can't sue you.
If you have money to settle a debt, that's likely the best way to pay less, and you may never hear from the creditor again. If you can't afford a settlement, think a debt collector is in error, or aren't bothered by getting contacted by creditors, then you can opt to pay nothing.
I can't guide you because everyone's life and financial situation differs. You're the only one who genuinely knows if you can or can't afford to pay a legitimate debt.