Is It Time For Regulators To Stab Zombie Debt Through The Brain?

The National Consumer Law Center is asking the Consumer Financial Protection Bureau to go full Daryl Dixon on the collection of zombie debt.

What a lot of people don’t know — and what debt collectors rarely mention — is that most unpaid debt has an expiration date after which you can’t be sued for repayment. And even fewer consumers are aware that this dead debt can be sparked back to life by making a payment after it’s already passed on to the debt afterlife. A new report calls on federal regulators to make sure that debt doesn’t rise from the dead in zombie form.

A 2013 study from the Federal Trade Commission estimated that more than 30% of debts purchased by debt buyers — who generally pay pennies on the dollar for the right to collect on money owed to businesses — were at least six years old, putting them beyond or near the end of the statute of limitations in many states.

But a new report [PDF] from the National Consumer Law Center believes that the percentage of zombie debt being purchased by collectors is even larger, as the FTC did not include information from the many smaller debt-buying operations that are the biggest purchasers of the oldest debts.

Additionally, the FTC study doesn’t look at the age of the debt when the debt-buyer makes its first attempt to actually collect.

“Regardless of the age at the time of purchase, debts continue to age throughout the course of the collection process,” reads the NCLC report, which cites the example of one debt-buyer that admittedly attempts to collect on debts for 10 years or more after the date that it purchases the debt, and that this same company has reported successfully collecting on debts that were at least 14 years old.

The people whose names are on these ancient debts likely had no idea that they could not have been sued for collection, and in some states — Wisconsin and Mississippi — out-of-statute debts are actually extinguished.

But simply making a payment or even acknowledging an out-of-statute debt can restart the clock all over again, leaving these consumers back in the crosshairs for possible legal action.

“Debt collectors often employ deceptive practices such as pushing consumers to make a small payment on time-barred debts just to restart the statute of limitations without the consumer realizing that the payment will revive a time-barred debt,” reads the report.

Making things more complicated is the fact that statutes of limitations vary from state to state. Even within the same state there might be different limits on debts from written and non-written contracts. Things get even more complex when you deal with debt owed to a company in a different state.

“Faced with these complexities, consumers cannot be expected to know if the statute of limitation has run on their debt or to understand that by doing nothing they may actually be in a better legal position than by doing something,” writes NCLC.

This is why NCLC is calling on the federal Consumer Financial Protection Bureau to ban all out-of-statute debt collection.

Claiming that collection of zombie debts is “unfair, deceptive, and abusive,” the report argues that the CFPB has the authority to ban the practice.

Citing a Supreme Court finding that statutes of limitations are intended to protect “defendants and the courts from having to deal with cases in which the search for truth may be seriously impaired by the loss of evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents, or otherwise,” the NCLC contends that the enforcement of statutory limits should apply to all collections activities, rather than allowing for a loophole for zombie debt.

But if the CFPB doesn’t enact a full ban on time-barred collections, the report suggests ways the Bureau could rein in the practice to minimize abuse.

First, NCLC recommends prohibiting debt collectors from threatening to sue or offering to settle out-of-statute debt. Since all states bar legal action for dead debt, but 48 of them don’t actually extinguish the debt, a ban on threats of lawsuits would help to prevent people from paying debt they may not owe or which can’t be proven they owe.

The report also suggests putting an end to legal action against consumers who restarted the statute of limitations clock by making a payment or acknowledging the debt.

“Collecting a payment from a consumer and subsequently using that payment as a basis for a lawsuit is inherently unfair, deceptive, and abusive,” reads the report. “The least sophisticated consumer cannot be expected to understand the counter-intuitive consequence of how a small payment places the consumer in far greater legal jeopardy than refusing to pay.”

The NCLC also asks the CFPB to ban the sale of out-of-statute debt. If the dead debt is never sold in the first place, it means fewer attempts to resurrect zombie debts.

“Debt collectors take advantage of the confusing laws governing the collection of zombie debt to induce people, including seniors, to pay debts that have expired or may not even be theirs,” said co-author and NCLC attorney Margot Saunders. “We hope that the CFPB will issue rules that simply ban collection of time-barred debt.”