WTF is "Zombie Debt"? How to Avoid Paying Something You Don't Actually Owe

You may not have heard of zombie debt, but odds are, it’s coming for you.
Publish date:
August 26, 2013
finances, debt, student loans, zombie debt, credit score

Let’s start off with a definition of what the heck "zombie debt" even is, shall we? I hadn't heard of it until I helped a friend who was besieged by collection agent calls. It turns out she didn't actually owe almost half of what they were harassing her about! Zombie debt is any debt that you aren't legally obligated to pay for any number of reasons, the big three being:

1. It’s already been settled in bankruptcy proceedings.

2. It’s the result of mistaken identity or identity theft.

3. The statute of limitations on said debt has expired.

Zombie debt has gotten its catchy nickname because it’s debt that just won’t die. It springs to life again and again, hunting you down in your house even though you don’t really owe it or thought you had addressed it.

If the debt in question really is zombie debt, it's dead. It may still be shuffling around on this earth in rags, trying to bite unsuspecting people, but it's no longer really alive. It can't hurt you unless you let it -- and I'm going to teach you how to identify zombie debt and how to tell creditors harassing you about it to stick it where the sun doesn't shine.

Zombie debt is also known as "junk debt." A huge industry has sprung up around the buying and selling of this "junk" or "default" debt. Take our first scenario above: say you default on a credit card bill or other unsecured debt. You choose to file bankruptcy and as a result, the debt is discharged after whatever number of years your state decrees.

An important side note here: student loan debt is technically unsecured debt, but intensely stringent regulations are attached to it -- making it practically impossible to be discharged by bankruptcy. ( has a decent commentary on the state of the current student loan crisis right now if you're interested.)

Let's get back to your hypothetical credit card default and subsequent bankruptcy. You've probably spent the intervening years rebuilding your credit one painful step at a time. You're paying your bills on time and your credit score is most likely starting to reflect all your hard work.

You have nothing to fear -- the debt you defaulted on all those years ago has been completely written off by the company and can no longer harm you, right?

Sadly, the answer is no. It’s probably still out there, waiting to eat your face off.

Most likely, the credit card company in question sold your defaulted credit card amount to a junk debt buyer for pennies on the dollar. That debt buyer is now banking on being able to harangue, threaten and intimidate you into paying the old amount, even if it's actually already been discharged via bankruptcy.

The profit margin for this junk debt collection practice is, as you can imagine, shockingly high. Unscrupulous collection agencies profit from your fear and misinformation. As I always say, an informed consumer is a smart consumer. So let’s inform ourselves as to what you should do when these undead creditors come calling.

The number one rule of zombie debt (or any debt, for that matter) is never to acknowledge the debt. Admit nothing. When a creditor says you owe a debt, politely ask him or her for proof of your debt responsibility in writing. This will be quite hard for some collectors to come up with, as in many cases, your outstanding balance has been bought and sold so many times over, the original paperwork is long gone.

You should also ask the collector to tell you the date of the original, first default (also known as the first time you missed your payment.) If it's longer than 3-10 years, depending on your state's laws, you’re most likely dealing with zombie debt -- and the creditor has no legal recourse against you. The statute of limitations has simply run out on the debt.

But they are hoping to bully you into paying it to avoid further "black marks on your credit report." News flash: they are lying to you. Debt that is older than your state’s statute of limitations cannot be reported on your credit report again, period. That is, unless you let it.

Because here’s the rub -- if the statute of limitations has indeed run out, you could actually do yourself more harm than good by acknowledging or making any payment, no matter how small, on ancient debt.

In many states, that automatically reopens the statute of limitations all over again and allows a debt to be reinstated on your credit report! Keep quiet, ask for proof in writing, and determine if the statute of limitations has run out on the debt or not.

Debt collectors obviously know that a huge portion of the debt they are attempting to recover is older than the statute of limitations -- they are just hoping you don’t know. I had good luck getting them to stop calling a pal of mine by asking them the first date of the original default and then informing them that I know they are holding worthless zombie debt, and to stop calling.

I’m exactly what they hate -- an informed consumer. This is the sentence I used: “The date of first default is longer than X number of years -- so what you are holding is zombie debt. Stop calling here.” They never, ever called back. I was informed, so I wasn't worth the trouble.

If the creditor sends you physical proof that you do indeed owe the debt, look at it very carefully. Educate yourself as to what the statute of limitations on debt is in your state. Send a letter demanding they stop contacting you and stating the reasons you don’t owe the amount: either the statute of limitations have run out, the amount was discharged via bankruptcy proceedings, or you’ve been the victim of identity fraud. Be sure to send this letter certified mail, return receipt requested through the US Postal Service and do it within 30 days.

The Fair Debt Collection Practices Act (or FDCPA) regulates what collectors can and cannot do in the course of attempting to collect a debt from you. For example: They can't call you before 8am or after 9pm, use obscene, profane, or abusive language, repeatedly call a third party to inquire about your whereabouts, call you at work knowing your boss doesn't approve, or ignore your written request for verification of the debt. (A more complete list of the most common FDCPA infractions can be found at Credit.About.Com.)

Zombie debt has historically been credit card debt, but in recent years, junk debt buyers are snapping up anything they can get their hands on: mortgage loans, auto loans and medical bills. It's tentacles are reaching farther and farther every year.

Let’s talk a little bit about the morality involved when you owe a debt. I believe it’s important to act with integrity in all of your life’s dealings, and paying what you owe is inherent in this.

However, junk debt that has trickled down to a collection agency is built around pure profit. You aren’t satisfying the original creditor that took the loss, you’re simply lining the pockets of bottom feeders and exposing yourself to even further damage to your credit score. Collection agencies know this and don’t care. They took a chance on ancient, worthless debt, hoping you are stupid enough to pay it by mistake. Don’t be fooled!

You may not know this, but you are legally entitled (via the Fair Credit Reporting Act) to a free yearly copy of your credit report from each the big 3 reporting agencies -- Trans Union, Equifax, and Experian. There are many sites that will charge you huge amounts for this same information -- so don't be fooled into paying. Annual Credit is the official site created by the big 3 credit reporting companies to adhere to the federal law entitling you to your free yearly credit reports. (Make sure to be ready with ink and paper to print out a physical copy of your reports so you can refer to them later if need be.)

Get in the habit of checking your credit report yearly so you can know what you're up against, good or bad. If you are currently in a student loan or other debt nightmare, I highly suggest checking out some of Dave Ramsey's tips. He is an author, speaker and radio show host with a strong emphasis on reducing, avoiding and eliminating personal debt. He tends towards some religious proselytizing here and there, but his techniques are no bullshit and really work. Getting out of crushing debt is no picnic -- but it can be done.

If you were too bored to read this entire post, here are the main 3 things you should remember if you are faced with what you believe might be zombie debt:

1. Don’t acknowledge any debt or agree to make a “good faith payment” under any circumstances.

2. Always ask the collections agent for proof that you owe the debt in writing, along with the date of the original default.

3. Research what your state’s laws are regarding the statute of limitations on debts. If they have run out, you are not legally obligated to pay the debt.

If you're interested in learning even more about possible zombie debt, here's some good reading:

"How to Deal with Zombie Debt"

"Occupy Wall Street group puts 'zombie' debt to rest"

"Zombie Debt - Old Debts, Statute of Limitations on Debt, Debt Validation"

"How Zombie Debt Works"

Alison Freer is the author of 'How to Get Dressed: A Costume Designer's Secrets for Making Your Clothes Look, Fit, and Feel Amazing'.