How Zombie Debt Works
The debt buying industry is a multi-billion dollar business. Here is how discharged debts end up being collected:
- Original creditor charges off the debt and sells it to a debt buyer for 2-10 cents on the dollar
- Debt buyer receives a spreadsheet with account numbers, names, and balances -- but often no bankruptcy status
- Debt buyer begins collection -- letters, phone calls, possibly lawsuits
- Debtor receives demands for a debt that was discharged years ago
The debt may be resold multiple times, each time losing more information about its actual status. By the time the third or fourth buyer attempts collection, there is often no record that the debt was discharged.
Why This Is a Systemic Problem
The discharged-debt problem is not rare. Studies and court filings reveal:
- Millions of discharged debts are sold in portfolio transactions each year
- Major debt buyers have been sanctioned repeatedly for collecting discharged debts
- Credit reporting agencies frequently display discharged debts as active obligations
- Some debt buyers file thousands of collection lawsuits per year, including on discharged debts
The burden falls on the debtor. There is no automatic system that prevents discharged debts from being sold and collected. The debtor must identify the violation and take action.
Protecting Yourself
- Keep your discharge order permanently. Store a copy in a safe place.
- Monitor your credit reports. Check all three bureaus at least annually for discharged debts being reported as active.
- Respond to any collection attempt on a discharged debt immediately. Send a written notice with your case number and discharge date.
- Do not pay anything. Paying even a small amount on a discharged debt may complicate your legal rights.
- Consult an attorney if collection continues after notice. Most consumer attorneys handle these cases on contingency.
Legal Remedies
If a debt buyer collects on a discharged debt, you have multiple legal remedies:
- Contempt of the discharge order -- File in the bankruptcy court that issued your discharge
- Fair Debt Collection Practices Act (FDCPA) -- Collecting a debt known to be invalid may violate the FDCPA
- State consumer protection laws -- Many states have additional protections against abusive collection
- Class action -- If the debt buyer has a pattern of collecting discharged debts, a class action may be appropriate
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