Zombie Debt: A Real-Life Horror Story

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A person with blemished credit and a history of defaulted debts will have trouble getting a credit card, so an unsolicited credit card application can seem like a lifeline. But some of these cards come with some very sneaky fine print that can rope people into paying for debts they are no longer responsible for — and the consequences can be devastating.

Credit card debts have statutes of limitations that vary by state, ranging from three to 10 years. After that time passes, the creditor can’t legally come after the borrower for the unpaid balance. The exception is if the borrower willingly agrees to pay back part of the debt. That payment brings the debt back to life.

“The problem is you can send in 10 bucks and you reanimate the debt,” says Suzanne Martindale, staff attorney at nonprofit Consumers Union. This “zombie debt” can take on a life of its own after a consumer makes what they think is just a token payment. “It opens you up to a lawsuit on the entire previous balance, or the original balance plus interest they claim has been accruing,” she says. “That could be a huge lump sum.”

(MORE: FTC Blasts Government Debt Collectors For Abuses)

The Wall Street Journal describes how banks and debt collection firms, in their efforts to find new ways to make money from charged-off debts, are partnering in a financial sleight-of-hand. Consumers get a credit card by agreeing to repay part of an old debt, but it’s not clear that these consumers realize they’re committing to repay a debt that otherwise would’ve faded into history.

The Journal says the banks are “eager partners” in these arrangements. “They receive fees and higher-than-average interest rates by granting debt collectors access to their license with MasterCard. The debt companies typically agree to cover losses to banks if borrowers stop paying,” the article says. “Collectors aren’t afraid of the risks in issuing new credit cards because they instantly turn a profit on virtually worthless debts.”

(MORE: Is That a Debt Collector Trying to Call Your Cell?)

The losers in these deals are the consumers tricked into repaying creditors they aren’t legally obligated to reimburse. It seems federal authorities agree; the FDIC and FTC have started going after some of these companies for deceptive practices and have ordered some of them to reimburse customers who inadvertently wound up in debt repayment programs for accepting what they thought was a run-of-the-mill credit card offer.

In the meantime, consumers who thought they were free of their debts thanks to statutes of limitations are finding that their “good faith” payments are instead the start of a new gauntlet of collection calls, trashed credit and even potential lawsuits from creditors — creditors who in most cases aren’t even the original lenders.

“The reason why we have statutes of limitations is because memories fade, documents disappear and people die,” Martindale says. “It’s a very important protection.” Consumers should be wary of any offers that try to circumvent it.

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