Zombie debt

Personal Finance

Debt can come back to haunt you years later

May 06, 2007|By Eileen AMbrose | Eileen AMbrose,Sun Columnist

Carole Kelley got a letter out of the blue last year saying she owed nearly $1,200 on an unpaid credit-card bill.

But Kelley says she never had plastic from the card issuer listed. No such debt had appeared on her credit report when she bought a house three years earlier. Her credit monitoring service had never turned up the debt. And the letter didn't use her current married name.

"So I called, and they told me I owed it. I said, `I don't understand this. What is this from? I can't even tell exactly where it began,'" says Kelley, a paralegal with a Westminster law firm.

When she pressed for answers, the situation turned ugly. The debt collector insisted the debt was on her credit report and that she owed it. "I got off the phone very angry, just frustrated," she says. "They treat you like a piece of dirt."

Kelley now suspects she is being haunted by zombie debt.

Zombie debt is just that - an old debt that won't die off. It may be passed from one debt buyer to another, for years, until one day consumers are startled to find a collector demanding payment.

It may be debt that the consumer owes and has forgotten - or hoped the creditor forgot. But it can also be old bills that have been paid, discharged in bankruptcy, racked up by an identity thief or belonging to someone who shares the same name. Many times, the details from the debt collector are so sketchy that consumers have no idea whether they owe the money or not.

"Usually, the sign of a zombie debt is you can't figure out what it is. It's very old. It's often from someone whom you never had a contract with so the names won't be familiar," says Towson consumer lawyer Jane Santoni. "You haven't heard anything for years and years and years. ... And then all of a sudden, it's back again. Well, where did it come from?"

Consumer and bankruptcy lawyers say zombie debt cases have grown along with the debt purchasing industry.

Debt purchasers have been around for a long time, but the savings and loan bailout in the mid-1980s took the industry to a new level.

The government sold off huge portfolios of delinquent credit-card debt to finance the bailout, spawning some of today's leading debt buyers, according to Bethesda-based Kaulkin Ginsberg, an adviser to debt buyers.

Now credit card issuers routinely package their uncollectibles and sell them to debt buyers for pennies on the dollar. Buyers take their turn at trying to collect and later might bundle uncollected debt to sell to another buyer. Debts may be sold again and again.

Credit-card bills remain the bulk of debt sold. But hospitals, retailers, gyms, utilities, cell phone service companies and student loan lenders are selling off their unpaid bills.

In 2005, debt buyers purchased $110 billion of consumer debt and the revenue from those old bills exceeded $3 billion, says Paul Legrady, director of Kaulkin Ginsberg.

It's a big business and growing, fueled by Americans' insatiable appetite for credit.

"We're a country that loves our debt, and whenever it is extended, there is a risk of default. And when that takes place, the sale of debt is a viable option for credit issuers," Legrady says.

This means more people will be visited by old debt that refuses to die.

`Once a week'

Sonya Smith-Valentine, a consumer lawyer in Greenbelt, says a few years ago clients would call once every four or five months to complain about zombie debt. "Right now, it's probably at least once a week," she says.

Bankruptcy lawyers say they increasingly see the resurrection of debt that was discharged by the court.

Baltimore bankruptcy lawyer Robert Grossbart says one of his clients had her debts wiped out in a 1988 bankruptcy, yet different debt collectors in the past few years have dogged her to pay those old bills.

Grossbart says sometimes people, like his client, find out about revived debts when a collector starts calling or sending letters. Or, they might discover it on their credit report when they're trying to get a loan or refinance a mortgage.

"It's sold so many times that the new buyer doesn't do any due diligence ... to verify whether this debt has been discharged or not," he says.

Brad Botes, a bankruptcy lawyer in Birmingham, Ala., says he tells clients to check their credit reports a few months after debts have been discharged. More than half the time, clients find discharged debts incorrectly reported, he says.

"Just like any other business, mistakes happen and they are typically corrected," says Dennis Hammond, president of The Debt Marketplace, a consultant to creditors and debt buyers.

But Hammond adds that credit-card issuers write off billions of dollars in unpaid bills each year and those losses are passed on to all consumers.

"Why is it the creditor or collector's fault that you haven't paid the bill or you think you shouldn't have to pay it?" he says. "Debt collectors aren't bad guys. They perform a service to every consumer in the marketplace to help keep prices down."

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