Zombie Debt: Settled and unearned debts haunt consumer credit reports for years

In 2021, federal watchdog sees 35,000 complaints about credit reporting and debt collections
InvestigateTV explores the financial phenomenon known as “zombie debt”. Reporter: Rachel DePompa, Videojournalists: Daniel Heffner, Owen Hornstein, Scott Pace
Published: Jan. 30, 2023 at 4:51 PM EST
Email This Link
Share on Pinterest
Share on LinkedIn

InvestigateTV - Tens of millions of Americans use credit cards. According to the New York Consumer Credit Panel, credit card debt is the most common type of debt, with “191 million Americans with at least one credit card account.”

With debt, late payments can often follow. While the numbers have dipped post-pandemic, according to the Urban Institute, in August 2021 “about 64 million people with a credit record had debt in collections.”

Debt in collections can negatively impact your credit score, which can affect your ability to apply for loans or purchase a home. According to experts, keeping your credit report clear of bad debt is critical to financial success.

But there is a financial phenomenon known as “zombie debt” that consumers and experts warn can repeatedly impact your credit report.

“Zombie debt” is a term used by the credit industry to describe debt that even after it was paid, the statute of limitations expired or in some cases was never owed at all resurfaces in collections. When the debt returns, collection agencies may still attempt to collect a debt, leading it to possibly reappear on your credit report and negatively affect your purchasing power.

Louisiana attorney David Szwak has battled zombie debt on behalf of his clients for more than three decades.

David Szwak a Louisiana based lawyer represented Jesse James in his fight against "zombie...
David Szwak, a Louisiana-based lawyer, represented Jesse James in his fight against "zombie debt." Szwak has been helping consumers fight against these issues for more than three decades.(Owen Hornstein)

Szwak said zombie debt often occurs when an old or expired debt – currently hidden from a consumer’s credit report – resurfaces if the reports are altered in any way. For instance, if a creditor makes any changes to the date or deletes any information from the credit report, the debt could return if it is deleted, rather than be properly suppressed. When creditors delete information, it deletes the item in the file but doesn’t mask any future changes in the report.

“So sometimes they tell you, ‘Oh, we’re removing that off your credit file,’ but then they don’t remove it. It comes right back on the file because it’s not been properly suppressed,” Szwak said. Szwak said at that point, his clients can face an uphill battle against a multitude of collectors.

Fighting Undead Debt:

U.S. Air Force veteran Jesse James found himself battling zombie debt after returning from a long tour overseas.

While he was gone, his wife took over their finances. One day while checking the mail, James noticed a credit card bill. The problem was James did not have any credit cards.

Unbeknownst to James, his wife had already made a payment for the bill thinking James had opened an account while away. James said he called the credit company in hopes of getting more answers, but the credit company denied his argument.

“They said once I did [make a payment], then I had assumed the debt of that credit card and I was like ‘No, this is not mine,’” James said.

Jesse James (right) stands beside his wife Amy and their two-year-old son, Maddox.  James is a...
Jesse James (right) stands beside his wife Amy and their two-year-old son, Maddox. James is a retired veteran of the U.S. Air Force who's spent 20 years living in Shreveport.(Jesse James)

He said he tried to argue with the credit company but to no fix. James never made another payment, and the bill for thousands of dollars went to collections. The collections agency eventually sued, and James went to court. A Shreveport, Louisiana court dismissed the claims and ruled it was a mixed credit file issue – meaning the debt belonged to someone also named Jesse James. At that point, James said he thought he would no longer have to worry about this issue.

“We thought we had everything fixed,” James said. “I kind of forgot about it.”

But when he and his wife tried to purchase a home, they found out the zombie debt had returned. James reached out to David Szwak for help.

According to Szwak, the sister company of the original debt collector had purchased the debt from the original case – even though it was supposed to be removed from James’ credit report.

“[The credit company] shifts it over to one of the sister company names, keeps writing you ugly letters, credit reporting about you,” Szwak said. “They’re just hoping to squeeze you enough to where you’ll pay it, even if you don’t owe it.”

It took four years to get the issue resolved. James said that time and the debt put his livelihood at risk.

“The company I work for right now, they take in financial responsibility,” James said. “So, showing irresponsible finances is detrimental on my job. I could have lost my job because of my finances.”

Szwak said although James’ debt was eventually cleared, the credit companies never confirmed to him the owner of the thousands of dollars of debt.

Statutes of Limitations:

The Fair Credit Reporting Act is a federal law designed to help ensure the accuracy, fairness, and privacy of information from consumer reporting agencies – it’s designed to protect the consumer information collected by credit bureaus. Under the law, Szwak said once you miss a payment, creditors have seven years to report you to the credit bureaus.

Once reported, each state has its own statute of limitations for different kinds of debt, meaning consumers need to understand how long a debt collector or creditor has to sue over an outstanding debt.

State statutes of limitations range from 3-15 years depending on the type of debt.

There are four different kinds of debt, according to Bankrate, a consumer financial service company:

  • Written contract – meaning there is a physical document that explains the terms and conditions in detail between two parties.
  • Oral contract – an agreement without written documentation signed by either party.
  • Promissory notes – a written contract with a written promise to make specific payments and with interest.
  • Open-ended accounts – accounts that give you a credit amount that you can use if you make payments.

The statute of limitations on debt is there to protect consumers from being sued. But consumers still have an obligation to repay that debt.

Federal Watchdog takes notice:

The Consumer Financial Protection Bureau (CFPB) is the “U.S. government agency dedicated to making sure you are treated fairly by lenders and other financial institutions.” The CFPB said in 2021 it received 35,000 complaints about credit reporting and debt collections beyond the statute of limitations, including some similar to James’.

Principal assistant director in the Office of Markets at the CFPB John McNamara helps monitor consumer financial services that cause harm to consumers.

He suggested if consumers notice something that should not be on their credit report, they should immediately file a complaint at consumerfinance.gov.

“Any debt that the consumers know that they paid, any collector that is trying to collect on that again has a problem, not the consumer,” McNamara said.

He said new regulation on debt collectors prevents and prohibits collectors from transferring debt that was paid, settled, or discharged in a bankruptcy proceeding.

At the end of 2021, the CFPB revised its rules about how debt collectors can communicate with consumers, including the number of times collectors can call you and what information companies are required to provide you while trying to collect any money from you.

If a collection agency sends you a notice about an old debt unfamiliar to you or one you have already paid, experts said verify your connection to that debt and identify the debt collections statute of limitations in your state.

Experts said that step is critical because once you make a payment on an old debt, even if it’s not yours, it restarts the clock on the statute of limitations.

Finally, notify the collection agency and all three credit bureaus (Experian, TransUnion, and Equifax) about your dispute in writing. Jesse James said he has learned from this experience and said his biggest takeaway is to pay close attention to your credit report and make your that debt does not go to a collection agency before you have talked to a lawyer about your case.

“If you find out that you have credit that is not yours and your credit company sends you something and you call, contact them immediately and say, ‘Hey this is not my debt,’” James said. “And if they continue to try to tell you that it is your debt, that’s when you should go to the lawyer.”

InvestigateTV reached out to the International Association of Commercial Collectors concerning their efforts to provide guidelines to prevent collection agencies from trying to collect debt consumers no longer owed. We did not hear back.