What Is Zombie Debt, And Why Won’t It Just Stay Dead?

Image courtesy of Daniel Lobo

John Oliver made a huge splash this week when, to prove a point on his show, he purchased $15 million worth of medical debt for $60,000… and then promptly forgave it all. A lot of that debt was “zombie debt,” which, like its namesake, keeps coming back from the dead to bother people who would much rather be left alone and unbitten.

But how does a debt die? What brings it back from its unmarked grave, anyway? It’s a long and sordid process, but there are two big things that lead to all of it:

  • One: Any unpaid debt can (and probably will) be sold.
  • Two: there is in theory a limit on how long unpaid debt can remain in play.

Here’s how it all fits together.

How does debt normally work?

You’ve got something — a loan, a credit card, medical debt — that needs repaying. Ideally, you meet repayment deadlines with the correct payment, the person you owe processes the payments correctly, attributes them to you, and in time, the debt is paid off and everyone’s happy.

But sometimes, things go wrong. The person who owes the money misses a payment, through accident or neglect. They can’t or won’t make the payments on time, or maybe the error is on the other end and the recipient isn’t processing the funds correctly. Either way, the debt is going unpaid. The entity that lent the money or performed the service gets annoyed about this, and sends the bill(s) to someone who specializes in getting some or all of the money back: Collections.

And when that happens…

Collections may be a department inside a massive business (like a hospital chain), or it may be an outsourced third-party company. Either way, their job is to try everything they legally can to get you to send them the money you owe, up to and including lawsuits. Sometimes they go too far, but that’s another story. The point is: bugging you until you pay up is their job.

Sometimes they succeed. Sometimes they fail. When they succeed, that should be the end of it. But when they fail, well, you know what they say…

If at first you don’t succeed…

The first-round collections may give up on you. The second-round collections may give up on you. But someone, somewhere, will keep trying.

That’s because that’s how they get paid: if you don’t pay up right away, the debt gets sold.

Let’s make up an example with completely fictitious numbers, and say that 100 people didn’t pay their bills to Company X for 90 days, and they went to collections. Those 100 people owe $1000 each for a collective total of $100,000. Company X sells the debts to Collections Company A for, let’s say, $15,000, and at least gets to pocket that much (writing off an $85,000 loss).

Now if Collections Company A can come up with more than $15k of payments out of $100,000 in debt, they make bank. So they hound every one of those 100 people with everything they can until they’ve made $25,000 total out of their $100,000 in owned debt, with half the debtors paying.

At that point, it’s not worth it to them anymore to keep chasing down the remaining 50 people, so they sell the remaining $50k in debt to Collections Company B. By now, after so many attempts, collecting on that money is a worse bet, so Company B buys $50,000 worth of 50 people’s debt for $2500. If Company B can manage to scrounge up even $3000 from these 50 people, they’ve made a profit.

This chain can go on for quite some time.

But “quite some time” isn’t “forever,” right? There are limits?

There are! Debt has a statute of limitations attached… theoretically.

The CFPB explains just what a statute of limitations is, but basically: you can only be subject to lawsuits over an unpaid debt for a certain period of time after it was incurred. After that window closes, you’re off that one particular legal hook.

Debts that are covered are called time-barred debts, but that period of time varies widely depending on what state you’re in and what kind of debt it is, so there’s no one hard-and-fast rule.

So if I can’t be sued anymore I’m free, right?

Wrong!

Just because you can’t be sued over it anymore doesn’t mean that Company X or any collection agencies that have since purchased some or all of the debt have to stop asking you to pay, because they don’t.

In most states, they can keep at it basically however long they want, as long as they’re acting within the boundaries of the law and not threatening to sue.

The two exceptions are Wisconsin and Mississippi, where a debt does in fact expire when its statute of limitations does.

So how does that lead to zombies?

Let’s go back to Company X, and the 50 folks who never paid. Ten years have passed since those debts were incurred, and those 50 folks are no longer legally lawsuit targets in any state.

At this point, we might effectively term the debt “dead,” and it kind of is. Except Collections Company P, down at the bottom of a long, long chain of resold debts, has just acquired that list of names — and really wants to make a buck.

So they send out letters and start making phone calls to those 50 people, none of whom has thought about these bills in at least seven or eight years. All of them have completely forgotten this debt was ever incurred, let alone has gone unpaid all this time.

One day “Jane Doe” gets a call telling her she owes a wad of cash. She feels particularly conscientious, and sends $50. Or maybe she doesn’t send anything, but says, “Oh! Of course I’ll pay what I owe!”

That action resets the statute of limitations. Because she promised to pay, the debt is now reborn, fresh. No longer dead, but a brand-new debt all over again, kicking off the whole process once more. And let’s remember that this debt can be continually resold: every single time a new company gets its hands on it, they can start demanding payment all over again.

In short, at this point it will continue to shamble along perhaps indefinitely, slowly but surely, maybe muttering “braaaaaaains” from time to time for maximum effect.

Which brings us back…

…to John Oliver.

The point of his exercise was in large part to convey just how awful the debt collection industry really is. The folks way down the chain, who buy the debt the second or tenth or hundredth time it’s sold, may not have any information about it. Or the information they have may be wrong. Or it may be out of the statute of limitations. Or the debt may never have been owed to start with, or the debtor has died, or one of a hundred other things has happened that means the person being harangued should be left alone.

As Oliver put it: “It is pretty clear by now that debt-buying is a grimy business and badly needs more oversight. As it stands, any idiot can get into it, and I can prove that to you, because I’m an idiot and we started a debt-buying company… And it was disturbingly easy.”

In fact, Oliver’s crew paid a whopping $50 to found their new debt-buying business, and in return were offered that pile of data — including names, addresses, social security numbers, and amounts that may or may not actually be owed anymore — on the $15 million worth of medical debt they have now so famously acquired.

The National Consumer Law Center, armed with their own reports on zombie debt, alongside a 2013 FTC report on debt buyers, asked the CPFB in 2015 to prohibit debt collection after a statute of limitations has expired.

The CFPB is considering updates to debt collection regulation, but is not at this time taking action on any proposed rules or rule changes.

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