Will New CFPB Rules Finally Be Able To Put Zombie Debt To Rest?

The phenomenon of zombie debt is not new to the U.S. economy — nor are consumer complaints about collection agencies that use aggressive tactics in the service of collecting such debt. For those unfamiliar with the term, zombie debt is debt a consumer legitimately owed, but that has passed the statute of limitations for when the debt can be collected in a court and/or has passed the duration of time it can be reported to the credit reporting bureaus.

The first number is regulated at the state level, and generally ranges from two to four years, while the second, credit reporting expiration, is at the seven-year mark.

Once those dates have passed a consumer can pay their old debts — but it is almost impossible to legally compel them to. Unless the consumer unwittingly restarts the clock on the debt — by either paying it in part, entering into a payment plan or acknowledging in writing that they owe the debt. That action by consumers restarts both clocks, meaning the debt can reappear as a delinquency on their credit report or they can be legitimately sued for it — the zombie debt has arisen from the grave.

That loophole in debt expiration has unfortunately driven a certain pernicious behavior among a particular class of debt collectors, usually those that specialize in buying up packets of expired debt for pennies on the dollar. Those collectors then begin aggressive collection practices against the debtor — often persuading unwitting consumers into behaviors that will restart the expiration clock, without ever mentioning during their high-pressure collection push that the debt they are trying to collect has in fact already expired.

In some extreme cases, these firms will even file in local courts, knowing that if the debtor shows up the case will immediately be thrown out — but if they neglect to appear the resulting default judgement against them will also restart the collections clock.

It’s a problem widely reported and most recently acknowledged by the Consumer Financial Protection Bureau (CFPB), which estimates that millions of U.S. consumers are contacted about time-barred debt each year — and that this behavior “can pose consumer protection concerns.” Consumers attempting to pay off old debt, the CFPB noted in a recent set of proposals, both run the risk of creating and falling behind on new debt, and being unable to meet their financial obligations such that they avoid debt in the first place.

Hence the CFPB is taking steps to finally confine old debt to the ground — and to make it harder for debt collectors to attempt to revive it again —  with two policy changes, one straightforward, one more controversial.

Tightening the Rules

The more straightforward and universally praised change moves to stop debt collectors from even attempting to sue on expired debt — if they know it is expired or if they “should know” (i.e. the debt is from outside the state’s statute of limitations for legal action). That will close off the ability of collection agencies to summon people to court simply on the hope they will fail to appear and get a default judgement that revives their debt, which is nearly universally agreed to be a problem — and a hardship for working consumers who often can’t simply skip a day of work to fend off what is essentially a nuisance summons.

The other revision to the CFPB debt collection rules would allow debt collectors to continue to reach out to customers in an attempt to collect expired debt — but would require they inform the consumer at the start of the collection call that the debt itself has expired and that they cannot to be sued for collections.

Consumer advocates have pushed back on this on the grounds that it does not go far enough in effectively limiting debt collection practices.

“The whole point of statute of limitations is that the government has decided that the debt is no longer collectible,” Linda Jun, senior policy counsel for Americans for Financial Reform told The Washington Post. “If you can’t be sued on it, why are you getting mail on it?”

But debt collectors and industry advocates note that expired debt is not uncollectable debt — and there are many consumers that in fact are willing to pay even knowing they won’t be sued for it. Making it impossible for the industry to try to reach those customers is going too far, according to Mark Neeb, chief executive of ACA International, a large industry group.

“There is a large gap between not being able to sue on a debt and not being able to collect on it at all. That is a bridge too far for us,” Neeb said.

Neeb also noted that having to inform consumers of their specific rights could pose a logistical challenge to debt collectors, since state regulations vary. Consumer advocates respond that it is more reasonable to ask debt collectors to take on that challenge than consumers themselves.

Where and how exactly these changes take effect remains to be seen, as the CFPB is still taking comments on the proposed revisions to its debt collection rules. So far it has received 14,000 responses and counting.

But while what’s next remains a developing story. It is clear that something is coming, simply because the scourge of zombie debts roaming the financial lives of consumers and biting them at inopportune times has gotten large enough to require addressing. It remains to be seen if more information, and closing off the courts as a loophole, will be the shot the CFPB is looking for.