“Zombie debt,” for New Yorkers unfamiliar with the term, is a debt you no longer owe that a collector has bought from a creditor nonetheless—whether it originated the loan or not—for a fraction of the price. The collector then tries to enforce the loan hoping you’ll repay it. Elsewhere, you may have heard the term, “charged off debt,” and wonder if it’s the same thing, or if it isn’t, what it means. Well, for one, it’s not zombie debt. What is it exactly?
“Charged off” debt is an accounting term, unlike zombie debt, which is a collection term. A bank charges off debt by declaring that it doesn’t expect the debtor to ever repay it. The important distinction here is that the zombie debt is unenforceable while charged off debt is. The debtor still owes the money, and if the bank sells it to a collector, it will have a valid enforcement claim against the debtor. The bank benefits by charging off debt because doing so gives it a tax exemption. Banks business is to buy and sell money, so a debt that has gone unpaid for a significant period of time is merely a business loss to the bank. Declaring the debt as a loss means it can remove it from its income for income tax purposes, so it pays less in taxes to the government.
There are a few rules banks must follow to charge off debt, otherwise they’d do it as often as they could around December to avoid having to pay income taxes. Installment loans cannot be charged off until 120 days after the first delinquent payment. For credit card debt, the rules are different. The minimum amount of time it must wait to charge off the debt is 180 days, and once it’s charged off, the account is no longer usable by the debtor.
The effects of a charge off on a credit score are significant. If it appears on your credit score, you will have significant difficulty obtaining new credit, and it stays on there for seven years. Even if you pay down the debt or settle it, the credit agencies will only change the entry from “Charged Off,” to, “Charge-Off Paid,” or, “Charge-Off Settled.” Paying down or settling a charged-off debt does not reduce the seven-year window, but it certainly looks better on one’s credit report.
Like zombie debt, banks will bundle charged off debt and sell it to collection agencies at a fraction of the cost. There are some defenses to collection attempts over charged-off debt, and they’re similar to typical collection efforts: you can claim the statute of limitations has run out if the creditor or collection agency has waited too long to collect on it (the limitations period begins at the first delinquent payment). If the limitations period runs out, the charged-off debt becomes zombie debt.
Otherwise, if the collection agency or the bank has a legitimate claim against you over charged-off debt, you will need to pay it, settle it, or discharge it in bankruptcy. At this point, you would likely need an experienced New York bankruptcy lawyer to handle your situation before it worsens.
For more questions about charged-off debt, zombie debt, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.
