What Is Zombie Debt and Why Is It a Problem?

07 Nov What Is Zombie Debt and Why Is It a Problem?

In a recent BusinessWeek article entitled Prisoners of Debt, the author discussed companies buying and selling debt that has already been discharged in bankruptcy. When the debt is revived by unlawful credit reporting or collection action it is often referred to as zombie debt. It seems that such debt can be purchased inexpensively and new ways have been found to collect it. Big financial interests are behind this debt trafficking and the market in discharged debt appears to be thriving.

How can this be? Why is uncollectible debt worth buying? Companies specializing in collection of debts that have been discharged in bankruptcy or have been rendered uncollectible due to the passage of time take the position that a debt unpaid is a debt that can still turn a profit.

It is clear that a discharge order is supposed to prevent a creditor from enforcing a debt covered by the discharge. However, if that debt continues to show up on a credit report and prevents the closing of a new home loan or substantially increases the interest rate for an automobile loan, it can be expedient to pay the debt despite the discharge.

There are legal remedies under the FCRA and even the FDCPA under some circumstances if the debt buyer tries to enforce the debt or demands payment. However, these remedies take a good deal of time to resolve the problem. If the debtor is a few days away from a real estate closing, is denied a loan to buy a new car or is turned down on a rental application or for a new job, these federal statutes are not any immediate help.

The credit reporting bureaus know how to properly report a discharged debt. Since 1986 the staff of the Federal Trade Commission has issued a series of formal “opinion letters” saying that the credit bureaus should report when debts have been discharged and telling them what to say. But credit bureaus are paid by the credit issuers and not by consumers. They respond to pressure from that quarter and pay little attention to the problems that incorrect credit reporting causes to a consumer.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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