sobal debt lawshool paper

8/13/2019 Sobal Debt Lawshool Paper

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PROTECTING CONSUMERS FROM ZOMBIE-DEBTCOLLECTORS

Neil L. Sobol*

ABSTRACT

The debt-collection business is booming, led by a dramatic increase inthe sale and collection of defaulted debts. Currently, debt buyers annuallypurchase more than $100 billion in the face value of debts. In the typicalpurchase, buyers pay only a small fraction of the face value of the debts; inreturn, they receive extremely limited, often inaccurate information. Manyof the debts that buyers seek to recover never existed or are no longer

enforceable by operation of law. Consumers who receive communicationsfrom debt buyers often complain about mistaken-identity and identity-theftcases where the individuals contacted never incurred the alleged debts.Additionally, buyers may seek recovery of debts that have been paid,settled, discharged in bankruptcy, or have become time-barred because thecollection period under the statute of limitations has expired.

By obtaining judgments or persuading consumers to pay a portion ofthese debts, acknowledge these debts, or enter into new agreements,collectors can transform these debts thought to be dead or non-existent,into living and enforceable debts. The media have labeled these

resurrected debts as zombie debts. Just as the zombies in movies comeback from the dead to terrorize individuals, dead debts may resurface tocause havoc for consumers. Even if a consumer successfully defeats onezombie-debt collector, the process may restart when the debt is resold.

Legal scholarship has only begun to address the issue. The scholarshiphas primarily focused on the collection of zombie debts through the courtsystem; however, the abuses are not limited to litigation. Collectors areoften successful in persuading consumers to pay dead debts without filing

*Associate Professor, Director of Legal Analysis, Research and Writing Program,

Texas A&M University School of Law. I appreciate the encouragement and assistance ofmy colleagues at Texas A&M including Susan Ayres, Mark Burge, Paul George, MichaelGreen, Jim Hambleton, Carol Pauli, Huyen Pham, Tanya Pierce, Peter Reilly, and FrankSnyder. I am also grateful for the feedback received following presentations at the EighthInternational Conference on Contracts and the 2013 Legal Writing Institutes WritersWorkshop.


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2 Neil L. Sobol 4-Nov-13

lawsuits. Moreover, efforts to make it harder for collectors to sue onunenforceable debts may increase pre-litigation abuses. Accordingly, thisArticle addresses zombie-debt issues before the onset of litigation. It

identifies the failure of traditional methods to deal with this growingproblem and proposes amendments to the federal Fair Debt CollectionPractices Act to establish uniform standards for the transfer of informationand documentation to debt buyers and consumers. Furthermore, penaltiesand limitation periods should be set to deter debt buyers from violating theAct. Finally, the Article emphasizes the importance of providing assistanceand education to consumers and suggests that the recently formedConsumer Financial Protection Bureau coordinate a federal, state, andlocal attack to combat zombie debt.

Table of Contents

Abstract ................................................................................................................... 1Introduction ............................................................................................................. 3I. The Growth of Consumer Debts and Debt Buyers .............................................. 9II. The Death of a Debt ........................................................................................... 14

A. Death because the Debt Never Existed ....................................................... 151. Mistaken Identity ............................................................................... 152. Identity Theft ..................................................................................... 17

B. Death because the Debt Has Been Satisfied................................................ 191. Paid or Settled Debts ......................................................................... 192. Debts Discharged in Bankruptcy ....................................................... 20

C. Death because the Statutory Limitations Period has Expired ..................... 21III. Resurrection of Dead Debts Zombie Debts ................................................... 23A. Becoming a Zombie Debt ........................................................................... 23

1. Partial Payment Revives Dead Debts ................................................ 232. Mere Acknowledgement may Revive Dead Debts ........................... 253. New Agreements Replace Dead Debts .......................................... 264. Judgments Replace Dead Debt .......................................................... 28

B. The Rise of the Zombie Debt Collectors: The Association betweenthe Growth in the Debt-Buying Industry and the Growth in ZombieDebts ......................................................................................................... 291. The Impact of the Information Received by Debt Buyers on

the Collection of Zombie Debts ........................................................ 302.

Motivations of Debt Buyers Contribute to the Collection ofDead Debts ........................................................................................ 36

3. Competitive Forces in the Debt-Buying Industry as a Factor inthe Spread of Zombie-Debt Collection .............................................. 37

IV. The Failure of Traditional Efforts to Curb the Growth of Zombie Debts ........ 38A. Federal Approach: The FDCPA Has Failed to Keep Pace with


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Protecting Consumers from Zombie-Debt Collectors 3

Zombie-Debt Collectors ........................................................................... 39B. State Approach: Lack of Uniformity Hampers the Efforts to Control

Zombie Debts ............................................................................................ 44V. Suggestions and Recommendations for Slaying Zombie Debts ........................ 45A. The Framework for a Solution .................................................................... 46

1. Coordinate the Zombie Slayers: The Consumer FinancialProtection Bureau .............................................................................. 46

2. Establish Standards to Attack Zombie Debts: Amending theFDCPA .............................................................................................. 50

B. Specific Methods to Slay Zombie Debts Before Litigation ........................ 511. Require Debt Sellers to Transfer Information and

Documentation at Time of Sale to Allow for Identification ofZombie Debts .................................................................................... 52

2. Require Collectors to Provide Consumers with Informationand Documentation to Allow For Identification of ZombieDebts .................................................................................................. 53

3. Require Collectors to Notify Consumers about theConsequences of Paying or Acknowledging UnenforceableDebts .................................................................................................. 55

4. Educate and Assist Consumers with Zombie-Debt Issues ................ 565. Amend the FDCPAs Penalty and Limitation Provisions ................. 59

Conclusion .............................................................................................................. 59

INTRODUCTION

Something coming back from the dead was almost alwaysbad news. Movies taught me that. For every one Jesus youget a million zombies.1

AHORROR STORY

The Opening: A Peaceful Setting

Grandparents, Harry and Helen Cooper, are enjoying a dinner attheir Florida home with their granddaughter, Karen, when the phone rings.

The Confrontation

Caller: May I speak with Henry Cooper?

1DAVID WONG,JOHN DIES AT THE END260 (2009).


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Harry: My name is Harry Cooper. I do not know Henry Cooper.You must have the wrong number.

Caller: No, our records indicate that I have the right number. I amhere to offer you a one-time deal that will help clean up your credit report.You currently owe a debt of over $3,500; however, if you work with us weshould be able to reduce the amount. Are you willing to work with us?

Harry: Why would I work with you? I do not know you, or whatyou are calling about. You have disturbed my dinner with my grandchild.

Caller: I am sorry about the disturbance, but if you had paid thisdebt I would not be calling. If you work with me today, you can prevent

future calls. I work for Romero Recovery Associates.

Harry: Romero who? I do not recognize the name. I do not have adebt with you.

Caller: Romero Recovery Associates is the current owner of acredit card debt that you had with Guardian Trust Bank in 1995. Now letssee what we can do about resolving this matter. Ill tell you what I can do --if you agree, to a three-month payment plan to cure this debt, I can reducethe outstanding debt by 50 percent.

Harry: 1995 seems like a long time ago. I am not sure that I everhad an account with Guardian, and even if I did I am pretty confident, Iwould have paid it. I always pay my debts. I just want to get back to mydinner with my wife and granddaughter.

Caller: Well, my records show that you still owe this debt. I do notwant to take you away from your grandchild, but my manager says that Ican only offer this deal today. Can you show me some good faith byagreeing to pay $25, today? That will keep the settlement offer open as wellas allow you time to return to your grandchild. We can then discuss thismatter when you have more time.

Harry: I do not recall this debt, but my granddaughter is leavingtonight and I really want to get back with her. I will pay you the $25 to keepthe deal open.


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The Epilogue

A zombie debt may have been created. A debt that may have never

existed, may have already been paid, or may be time-barred has nowbecome alive and enforceable based on the agreement to pay a nominalamount.

Classic horror films depict zombies as deformed flesh-eating monstersthat have come back from the dead to attack the living.2Moreover, they areextremely hard to kill.

3While the zombies in these films are only fictional,

4

a non-fictional zombie now exists that has created a real fear for consumers.Media sources have identified this real zombie as zombie debt.5Like thecinematic zombie who was originally thought dead but is now alive and

attacking individuals, zombie debt is a debt that was considered dead ornon-existent but has now come to life causing havoc with consumers andtheir credit histories.

6

2See, e.g., NIGHT OF THE LIVING DEAD(Image Ten, Laurel Group, Market SquareProductions & Off Color Films 1968) (Following the crash of a satellite, the dead comeback to life as zombies seeking to eat the living);DAWN OF THE DEAD (Laurel Group 1978)(In this sequel, individuals seek refuge from flesh-eating zombies by hiding in a desertedmall). For a listing of 250 zombie films, see IheartZombies1,Zombies, Zombies, Zombies300Films, IMDB.COM,http://www.imdb.com/list/q1EFAbRWd40/?start=1&view=compact&sort=listorian:asc(last visited July 19, 2013).

3

James,How to Kill a Zombie: Ten Best Ways to Kill a Zombie, YAHOO

VOICES

,http://voices.yahoo.com/how-kill-zombie-ten-best-ways-kill-zombie-4740282.html (lastvisited July 19, 2013) (The undead are notoriously difficult to kill, the base reason beingbecause they are already dead.).

4Although the Hollywood films are fictional, scholars have addressed the role ofzombies in folklore from Haiti and Africa. See, e.g., Hans-W. Ackermann & JeanineGauthier, The Ways and Nature of the Zombi, 104 J.AM.FOLKLORE466 (1991);Louis P.Mars, The Story of Zombi in Haiti,45 MAN 38(1945).

5See, e.g., Liz Pulliam Weston, Zombie Debt is Hard to Kill, EDUC.CTR.2000,http://educationcenter2000.com/debt_collectors/zombie.htm (last visited July 19, 2013)(originally published at MSN Money in July 2006); Madan G. Singh,Zombie Debts, aDiscussion, EZINEARTICLES.COM(Feb. 10, 2012), http://ezinearticles.com/?Zombie-Debts,-a-Discussion&id=6872870 (last visited July 19, 2013). Zombie debts have also become asubject of several blog entries. See, e.g., Jonathan Ginsberg,How Debt Buyers Turn

Zombie Debt into Valid Claims, BANKR.LAW NETWORK,http://www.bankruptcylawnetwork.com/how-debt-buyers-turn-zombie-debt-into-valid-claims/ (last visited July 19, 2013).

6Michael Forbes,Beware the Zombie Debt Collectors: Consumer Rights Abuses byPurchasers of Old and Uncollected Debt, LEXIS (Sept. 2, 2009),http://www.lexis.com/research/retrieve?_m=e232029786a6e94d1fb20edbdf409879&csvc=


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The sources of zombie debt vary.7 They include debts that hadpreviously been paid or settled, debts that had been discharged in

bankruptcy, debts that do not belong to the alleged debtor (due to mistakenidentity or identity theft), or debts for which the limitations period forcollection has expired.8 Although these debts are typically consideredunenforceable, the efforts of collectors can transform dead debts into liveor zombie debts.9Zombie debts can arise if collectors are able to persuadeconsumers to pay something on the debts, acknowledge the debts, or enterinto new agreements.

10 Moreover, collectors may sue on dead debts and

obtain judgments, typically by default, which replace the dead debts withlive judgments.11

Just as in horror movies where the zombie population seems to grow at

an exponential rate,

12

the number of individuals attacked by zombie debtshas also exploded in recent years due to the phenomenon of debt buyers.13This relatively new but rapidly growing breed of collectors purchasescharged-off debts at cents on the dollar.14They have different motivationsthan creditors who may seek future business with consumers or collectorswho operate on a commission basis.

15Instead, buyers are motivated by their

financial stake in the purchased debts, and they have no expectation offuture dealings with alleged debtors.16Consequently, debt buyers tend to bemore aggressive in collections than creditors or commission-based

le&cform=byCitation&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVzV-zSkAb&_md5=c35195f88f03dff6e38bfce4ab55dd61.7Weston, supranote 5.8See infraPart II.9See infraPart III.A.10See infraPart III.A.1-3.11See infraPart III.A.4.12See, e.g., DAWN OF THE DEAD,supranote 2. IMDB describes the ever-growing

epidemic of zombies in the Dawn of the Dead.Dawn of the Dead, IMDB.COM, athttp://www.imdb.com/title/tt0077402/ (last visited Jun. 19, 2013). Interestingly, some matheducators use the rapid rise in the zombie population as an example of exponential growth.See, e.g.,Engaging and Motivating with Zombie Exponential Growth, available athttp://orielly.weebly.com/motivating-with-zombie-exponential-growth.html (last visitedJuly 19, 2013).

13See infraPart III.B.14Gary Rivlin,Americas Abusive Debt Collectors,NEWSWEEK,Jan. 1, 2012 available

at http://www.thedailybeast.com/newsweek/2012/01/01/america-s-abusive-debt-collectors.html; see infra, notes 199 -204 and accompanying text.

15See infraPart III.B.2.

16Id.


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collectors.17

Similarly, uncertainties based on the information transferred in the sale

to debt buyers increase the likelihood of zombie-debt collection.

18

Typically, debt buyers receive only summary data and little, if any,documentation concerning their purchased debts. Moreover, the limitedinformation provided may be inaccurate.

19As a result, buyers often try to

recover from people who are not actual debtors or from people who havealready paid or settled debts.20 Additionally, their collection efforts oftenare directed at unenforceable debts, including debts discharged inbankruptcy and debts for which the limitations period has expired.

21

Although media sources and blog entries have popularized the termzombie debt,

22 legal scholarship has only begun to address the issue.

23

The scholarship has primarily focused on the collection of zombie debtsthrough the court system;24however, the abuses are not limited to litigation.

17Id.18See infraPart III.B.1.19Id.20Id.21Id.22See supra note 5 and accompanying text.23See Victoria J. Haneman, The Ethical Exploitation of the Unrepresented Consumer,

73 MO.L.REV. 707, 712 & n.23 (2008); Peter A. Holland,The One Hundred BillionDollar Problem in Small Claims Court: Robo-Signing and Lack of Proof in Debt Buyer

Cases, 6 J.B

US.&

T

ECH.L. 259, 259 (2011); Lauren Goldberg, Note,Dealing in Debt: TheHigh-Stakes World of Debt Collection After FDCPA, 79 S.CAL.L.REV. 711 (2006);

Young Walgenkim, Comment, Killing Zombie Debt Through Clarity And Consistency inthe Fair Debt Collection Practices Act, 24 LOY.CONSUMER L.REV. 65 (2011). JoshuaWarren has created a blog, Zombie Law, dedicated to the identification of zombies inpolitics and the law.About ZombieLaw, ZOMBIELAW.COM,http://zombielaw.wordpress.com/about/ (last visited Jan. 3, 2013). He is also creating acasebook to discuss over 300 federal cases that refer to zombies. SeeZombieLaw THEBOOK, ZOMBIELAW.COM, http://zombielaw.wordpress.com/zombielaw-the-book/ (lastvisited Jan. 3, 2013); Jill Schachner Chanen,Zombies-at-Law: NY Lawyer Fascinated bythe Laws Fascination with Zombies, A.B.A. J., Dec. 2012, at 9.

24See, e.g., Judith Fox,Do We Have a Debt Collection Crisis? Some Cautionary Talesof Debt Collection in Indiana, 24 LOY.CONSUMER L.REV. 355 (2012) (studying forumshopping by national collection firms in Indiana); Haneman, supra note 23 (discussing the

ethical issues involved in seeking default judgments against consumers for time-barreddebts); Holland,supranote 23 (addressing the problems of robo-signing by debt buyers insmall-claims-court actions); Mary Spector,Debts, Defaults and Details: Exploring theImpact of Debt Collection Litigation on Consumers and Courts,6 VA.L.&BUS.REV. 257(2011) (studying the role of debt buyers in collection cases in more than 500 Dallas Countycourt cases); Eric Y. Wu, Note,Is Financial Reform Too Big to Fail? Emerging from the


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Zombie-debt concerns begin with the communications between consumersand collectors.25Collectors are often successful in persuading consumers topay dead debts without filing lawsuits. Moreover, efforts to make it harder

for collectors to sue on unenforceable debts may increase pre-litigationabuses.Accordingly, this Article focuses on attacking zombie debts at thepre-litigation stage. While efforts to combat zombie debts should bedeveloped at all levels, battling the demons before litigation will also helpreduce the incidence of subsequent problems at the litigation and post-litigation stages.

This Article examines the roots of and problems associated with zombiedebts. Part I briefly describes the consumer-debt crisis in America andidentifies the rapid growth of the debt-buying industry. Part II definesunenforceable or dead debts. The transformation of dead debt into zombie

debt is the subject of Part III. It describes how the growth of debt buyinghas contributed to the increase in the collection of zombie debts.

The remainder of the Article discusses methods to prevent the spread ofzombie debt. Part IV identifies the failure of traditional federal and stateefforts to prevent the proliferation of zombie-debt collection. Finally, Part Vpresents a general framework and specific suggestions to help reduce theincidence of zombie debts. The federal Fair Debt Collection Practices Act(FDCPA),

26originally enacted in 1977, must be amended to address the

dramatic increase in zombie-debt issues that has accompanied the growth inthe debt-buying industry. Uniform standards for the transfer of information

and documentation to debt buyers and to consumers should be established.The recently formed Consumer Financial Protection Bureau (CFPB) hasthe power and authority to coordinate the attack on zombie-debt collectorsat the federal, state, and local levels. Additionally, consumer education andassistance is essential to help individuals understand what to do when

Financial Crisis with the Help of Increased Consumer Protection and CorporateResponsibility, 60 AM.U.L.REV. 1561 (2011) (discussing the need for moredocumentation in default judgment matters). Some scholarship has addressed zombie-debtconcerns at the pre-litigation level. See, e.g. Walgenkim, supranote 23 (suggesting thatzombie-debt problems are created by debt collectors who incorrectly identify themselves ascreditors under the federal Fair Debt Collection Practices Act (the FDCPA)); Timothy E.

Goldsmith & Nathalie Martin, Testing Materiality Under The Unfair Practices Acts: WhatInformation Matters When Collecting Time-Barred Debts?, 64 CONSUMER FIN.L.Q.REP.372 (Winter 2010) (identifying the results of a study addressing whether consumers wouldpay time-barred debts if they were informed that such debts were not enforceable).

25See Walgenkim, supra note 23, at 90.26FDCPA, 15 U.S.C. 16921692p (2006) (FDPCA).


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confronted with zombie debts. As citizens in the horror movies need torecognize zombies and possess the proper weapons and skills to kill them,consumers in the real world must understand when debt buyers are seeking

to collect zombie debts and require the appropriate tools and knowledge todefeat zombie-debt collectors.

I.THE GROWTH OF CONSUMER DEBTS AND DEBT BUYERS

Over the last three decades, the growth in consumer debts has beenstaggering. From 1980 to 1995, consumer debt in the United States grewfrom approximately $350 billion to $1.1 trillion.

27Since 1995, outstanding

consumer debt has more than doubled.28From 1980 to 2011, consumer debtincreased more than 60 percent faster than income.29 According to theFederal Reserve, outstanding consumer debt in the United States in 2012

was over $2.7 trillion, reflecting an average of nearly $8,800 for everyAmerican resident.30 Moreover, these debt figures consist of intermediateand short-term credit and do not include consumer debt secured by realestate.31

The Federal Reserve further divides consumer debt into revolving andnon-revolving debt. Non-revolving debt includes student and vehicle loansand may be secured or unsecured.32 Credit-card debt is the primarycomponent (approximately 98 percent) of revolving debt. Although credit-card debt has dropped from a high of $1 trillion in 2008 to approximately$850 billion in 2012, it still remains about one-third of the total outstanding

27FED.RESERVE SYS., BD.OF GOVERNORS, CONSUMER CREDIT G.19,HISTORICALDATA FOR CONSUMER CREDIT OUTSTANDING (LEVELS), available athttp://www.federalreserve.gov/releases/g19/HIST/cc_hist_sa_levels.html (last updated Oct.7, 2013).

28Rick Jurgens & Robert J. Hobbs, Nat'l Consumer Law Ctr., The Debt Machine, Howthe Collection Industry Hounds Consumers and Overwhelms Courts 5 (July 2010)[hereinafter The Debt Machine], available atwww.nclc.org/images/pdf/pr-reports/debt-machine.pdf.

29Consumer Debt Statistics, MONEY-ZINE.COM, http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Consumer-Debt-Statistics/ (last visitedJun. 20, 2013) (relying on data from the Federal Reserve Board).

30Id.; FED.RESERVE SYS., BD.OF GOVERNORS, CURRENT STATISTICAL RELEASESCHEDULE FOR CONSUMER CREDIT AUG.2013, available athttp://www.federalreserve.gov/releases/g19/Current/ (last updated Oct. 7, 2013 andreflecting total outstanding consumer debt for 2012 at over $2.9 trillion).

31Consumer Debt Statistics, supra note 29; FED.RESERVE SYS., supranote 30, at n.1.32FED.RESERVE SYS., supranote 30.


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consumer debt.33

About 75 percent of American families own at least onecredit card.34The average credit-card debt per household is approximately$7,400 with cardholders having an average of eight credit cards.35

Growth in the collection industry has mirrored the dramatic increase inconsumer debts.36Since the 1970s, collection industry jobs have more thanquadrupled and inflation-adjusted revenue for the industry has increased bymore than six times.37Estimates are that one to four billion collection callsare made each year.38Fourteen percent of Americans, nearly thirty millionindividuals, receive calls.

39

In the last decade, the formation and growth of the debt-buying industryhas created the most significant change in the debt-collection business.40The industry has emerged as one of the fastest growing sectors of all

33Consumer Debt Statistics, supranote 29; FED.RESERVE SYS., supranote 30.34CONSUMER FIN.PROT.BUREAU,SEMI-ANNUAL REPORT OF THE CONSUMER

FINANCIAL PROTECTION BUREAU44 (Jan. 30, 2012), available athttp://files.consumerfinance.gov/f/2012/01/Congressional_Report_Jan2012.pdf [hereinafterCFPB Semi-Annual Report].

35Credit Card Debt Statistics, MONEY-ZINE.COM, http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Credit-Card-Debt-Statistics (last visitedJun. 19, 2013) (relying on data from the Federal Reserve Board).

36SeeMary Spector,Litigating Consumer Debt Collection: A Study, 31 No. 6 Banking& Fin. Servs. Poly Rep. 1, 2 (2012); Holland, supranote 23, at 264.

37SeeFED.TRADE COMMN,COLLECTING CONSUMER DEBTS:THE CHALLENGES OF

CHANGE

,A

W

ORKSHOPR

EPORT13 (2009), available athttp://ftc.gov/bcp/workshops/debtcollection/dcwr.pdf [hereinafter FTC Workshop].

38Caroline E. Mayer,As Debt Collectors Multiply, So Do Consumer Complaints,WASH.POST, July 28, 2005, www.washingtonpost.com/wp-dyn/content/article/2005/07/27/AR2005072702473.html (explaining that the typicalcollector makes over 40,000 calls per year); seeThe Debt Machine, supra note 28, at 5.

39See Patrick Lunsford,Americans with an Account in Third Party Collections HitsAll-Time HighAgain, INSIDEARM.COM,(May 15, 2013) available atwww.insidearm.com/daily/banks-and-credit-grantors/auto-finance-receivables/americans-with-an-account-in-third-party-collections-hits-all-time-high-again/ (relying on first quarter2013 statistics from the New York Federal Reserve Bank available athttp://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12013.pdf); CONSUMER FIN.PROT.BUREAU,CFPBANN.REP.2013:FAIR DEBTCOLLECTION PRACTICES ACT 8 (2013), available at

http://files.consumerfinance.gov/f/201303_cfpb_March_FDCPA_Report1.pdf [hereinafterCFPB 2013 Ann. Rep.] (citing FEDERAL RESERVE BANK OF NEW YORK,QUARTERLYREPORT ON HOUSEHOLD DEBT AND CREDIT(2012), available athttp://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q32012.pdf).

40SeeFTC Workshop, supranote 37, at iv.


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financial services.41

It includes companies that buy charged-off debts atdeep discounts from creditors and resellers.42

The modern debt-buying industry evolved after the savings and loancrisis of the late 1980s.43 Responding to the crisis, Congress created theResolution Trust Corporation to handle the sale of the assets of insolventinstitutions.

44Purchasers realized they could profit by buying and collecting

on debts originally owned by these failed institutions.45 They soonrecognized that solvent lenders were also eager to sell off debts at deepdiscounts.

46

Then, in the late 1990s, the influx of institutional investors sparked adramatic growth in the debt-buying industry.47 Applying principles ofeconomies of scale, companies began to buy and collect on larger portfolios

of bad debt. This, coupled with an increase in consumer spending and adesire by merchants to avoid the collection process, created astronomicalgrowth in the purchasing of debts.

48In the span of twelve years (from 1993

to 2005), the amount of purchased debt rose nearly twenty times, increasingfrom $6 billion to over $110 billion.49Sales of credit-card debt accountedfor about 90 percent of the $110 billion.

50During the five-year period from2001 to 2006, the top four debt-buyer firms saw their net incomes increaseby more than 700 percent.51In 1996, the number of debt-buying companies

41Holland, supranote 23, at 265.42Asset Buying Facts, ACAINTL, http://www.acainternational.org/products-asset-

buying-facts-9735.aspx (last visited Sept. 28, 2012).43Id.44Id.45Id.46Id.; Goldberg, supranote 23, at 725 (identifying the federal governments sale of

debts of distressed banks and Bank of Americas sale of old credit-card debt as the keytransactions stimulat[ing] a revolution of the debt-collection industry).

47SeeHaneman, supranote 23, at 715; Goldberg, supranote 23, at 72526.48Goldberg, supranote 23, at 72628. As consumers took on more debt, especially in

the form of credit-card debt, creditors had more debt to sell. FED.TRADE COMMN,THESTRUCTURE AND PRACTICES OF THE DEBT BUYING INDUSTRY13 (2013), available athttp://www.ftc.gov/os/2013/01/debtbuyingreport.pdf [hereinafter FTC Debt BuyingIndustry].

49Asset Buying Facts, supranote 42 (estimating the face value of debt purchased in

the United States in 2005 at $110 billion);seeThe Debt Machine, supranote 28, at 18.50Debt Deception: How Debt Buyers Abuse the Legal System to Prey on Lower-

Income New Yorkers, NEIGHBORHOOD ECON.DEV.ADVOCACY PROJECT, 3 (May 2010),http://www.nedap.org/pressroom/documents/DEBT_DECEPTION_FINAL_WEB.pdf[hereinafter Debt Deception].

51Id.at 3.


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was estimated to be only about a dozen firms.52

Currently, over 500privately owned companies as well as at least four publicly-tradedcompanies are debt buyers.53

The collection industry helps the economy. In 2010, collectorsrecovered nearly $55 billion in total debt.54 The payroll impact from theindustry, which employs over 300,000,

55 is estimated at over $10 billionwith a tax impact of nearly $2 billion.56Job opportunities are projected togrow at a rate faster than any other industry.57Industry officials anticipatethat the collection industry will contribute over $500 billion and 100 millionjobs to the U.S. economy during the next ten years.

58

Although the industry benefits the economy, an increase in the numberof complaints has accompanied the increase in consumer debt and

collectors. In 2011, consumers filed more than 140,000 complaints with theFederal Trade Commission (FTC) against third-party and in-house debtcollectors.

59The industry is the leader in complaints received by the FTC

52Mayer, supranote 38.53Id.; Debt Deception, supranote 50, at 4; U.S.GOVT ACCOUNTABILITY OFFICE,

GAO-09-748,CREDIT CARDS:FAIR DEBT COLLECTION PRACTICES ACT COULD BETTERREFLECT THE EVOLVING DEBT COLLECTION MARKETPLACE AND USE OF TECHNOLOGY 7(2009), available athttp://www.gao.gov/new.items/d09748.pdf [hereinafter GAO Report],cited in FED.TRADE COMMN,REPAIRING A BROKEN SYSTEM:PROTECTING CONSUMERS INDEBT COLLECTION LITIGATION AND ARBITRATIONat 5 n.10 (2010), available athttp://www.ftc.gov/os/2010/07/debtcollectionreport.pdf [hereinafter FTC Broken System].

54

ERNST

&Y

OUNGLLP,

T

HEIMPACT OF

THIRD

-PARTY

DEBT

COLLECTION ON THE

NATIONAL AND STATE ECONOMIES2 (2012), available athttp://www.acainternational.org/files.aspx?p=/images/21594/2011acaeconomicimpactreport.pdf [hereinafter EY Report] (study of collection agencies commissioned by ACAInternational, the Association of Credit and Collection Professionals). As with otherindustries, the recession has reduced profitability of debt collection industry. SeeRichardM. Alderman, The Fair Debt Collection Practices Act Meets Arbitration: Non-parties andArbitration, 24 LOY.CONSUMER L.REV. 586, 588 n.12 (2012) (citing Patrick Lunsford,The Myth of the Debt Collection Boom, FORBES, Feb. 23, 2012, available athttp://www.forbes.com/sites/insidearm/2012/02/23/the-myth-of-the-debt-collection-boom/).

55SeeAlderman, supra note 54, at 588 (citing Collections Information, ACAINTL,http://www.acainternational.org/products-collections-information-5431.aspx (last visitedOct. 31, 2013)).

56SeeEY Report, supranote 54, at 23.57Fox, supranote 24, at 358 (citing Bureau of Labor Statistics estimating growth rates

for the period 2008 to 2018).58Martin Sheer, On the Clock, COLLECTOR, Sept. 2010, at 9.59SeeCONSUMER FIN.PROT.BUREAU,CFPBANN.REP.2012:FAIR DEBT COLLECTION

PRACTICES ACT 6 (2012), available at


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and the recently formed CFPB.60

Approximately, 25 percent of allcomplaints received by the FTC relate to the collection industry.61 Asconceded by the FTC, the reported numbers may underestimate the total

number of complaints, as they are limited to complaints filed with theFTC.62The numbers do not include complaints made to the collector, theoriginal creditor, or other agencies.63The FTC report further underestimatescomplaints against collectors because it does not include identity theft or

http://files.consumerfinance.gov/f/201203_cfpb_FDCPA_annual_report.pdf [hereinafterCFPB 2012 Ann. Rep.]. In 2012, direct complaints to the FTC about collectors decreasedto about 125,000; however, debt collection still ranked as the top industry target forconsumer complaints. CFPB 2013 Ann. Rep., supranote 39, at 14. Additionally, theConsumer Sentinel Network (CSN) reported the FTC and entities that partner with theFTC received more consumer complaints in 2012 than in 2011.Id.at 14 n.13 (citing FED.

TRADE COMMN,CONSUMER SENTINEL NETWORK DATA BOOK FOR JANUARY -DECEMBER2012 6, 81 (2013), available athttp://www.ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2012.pdf [hereinafter 2012 CSN Report]). For more information aboutthe CSN, seeinfra notes 6872 and accompanying text.

60CFPB 2013 Ann. Rep., supranote 39, at 14. The CFPB, which was created by theDodd-Frank Wall Street Reform and Consumer Protection Act of 2010, identifiescollecting consumer complaints as one of its core functions. The CFPB began collectingcredit-card consumer complaints in 2011; however, the Bureau has since expanded itsscope to include mortgage complaints, bank products and services, and a variety of loans.Learn About the Bureau, CONSUMER FIN.PROT.BUREAU,http://www.consumerfinance.gov/the-bureau/ (last visited Sept. 7, 2013); Andrew G. Berget al., The Consumer Financial Protection Bureau The New Sheriff in Town , NATL LAWREVIEW(July 16, 2012), http://www.natlawreview.com/article/consumer-financial-

protection-bureau-new-sheriff-town. Similarly, the Better Business Bureau reported thatthe debt-collection industry ranked fifth in its 2010 list of the most complained aboutindustries. BETTER BUS.BUREAU,THEY DEAL IN BILLIONSABBBSTUDY OF THE DEBTCOLLECTION INDUSTRY,ITS SOARING GROWTH AND PROBLEMS FOR CONSUMERS1 (2011),available athttp://stlouis.bbb.org/Storage/142/Documents/Bill%20Collector%20Study%20(FINAL%20WITH%20CHANGES)%2012%2027%202011.pdf [hereinafter BBB Study].

61SeeCFPB 2013 Ann. Rep., supranote 39, at 14.62Id.at 12. On the other hand, the FTC recognizes that not all complaints are

violations of the FDCPA.Id. at 12-13.63Id. at 13; seeThe Debt Machine, supranote 28, at 7. In July 2011, the CFPB

established a method to make the reporting of consumer complaints easier. It was initiallyestablished for credit-card complaints and has now been extended to cover consumercomplaints about mortgages, bank products, student loans, and other consumer loans.

CFPB 2012 Ann. Rep., supranote 59, at 5. In June 2012, the CFPB released an overviewand analysis of its program for the time period July 21, 2011 to June 1, 2012. CONSUMERFIN.PROT.BUREAU, CONSUMER RESPONSE:ASNAPSHOT OF COMPLAINTS RECEIVED(2012), available athttp://files.consumerfinance.gov/f/201206_cfpb_shapshot_complaints-received.pdf [hereinafter CFPB Consumer Response Report]. The report identifies billingdisputes as the top credit-card complaint.Id.at 4.


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Do Not Call Registry complaints.64

The FTC groups complaints against collectors into fifteen categories.65

In 2012, the activities receiving the most complaints were collectors seekingto recover debts that were either inflated or not owed (including debtsdischarged in bankruptcy).66 These complaints accounted for nearly 40percent of the complaints against the collection industry.

67

Additionally, through its Consumer Sentinel Network (CSN), the FTCmaintains an online database of over eight million consumer complaintscollected since 2008.

68The database, accessible by federal, state, and local

law enforcement authorities, includes complaints received by the FTC, theCFPB, other federal agencies, state organizations, and nongovernmentalorganizations including the Council of Better Business Bureaus.

69In 2012,

more than two million complaints were submitted to CSN.

70

The FTCdivided these complaints into thirty categories.71 Identity theft and debtcollection complaints ranked as the top two categories, accounting for 28percent of all complaints received.72

II.THE DEATH OF A DEBT

Just as in horror flicks where the source of a zombie is a dead person,73the source of zombie debt is a dead debt. Although the vast majority ofdebts collected are valid, an increasing number of debts should beconsidered dead.74These unenforceable debts typically fall into one of three

64SeeCFPB 2013 Ann. Rep., supranote 39, at 14 n.6. For a discussion of identitytheft issues, see infra notes 95-106 and accompanying text.

65CFPB 2013 Ann. Rep., supranote 39, at 15.66Id. at 17-18.67Id.at 18 & app. C.682012 CSN Report, supra note 59, at 3. Data has been collected since 1997; however,

complaints that are more than five years old are removed from the database.Id.at 2. Thedatabase is available at http://www.ftc.gov/sentinel/.

69Id.at 2. The Council of Better Business Bureaus includes all of the North AmericanBetter Business Bureaus.Id.

70Id.71Id.72Id.at 23. Identity theft received 18 percent of the overall complaints while debt

collection received 10 percent of the overall complaints.Id.at 3.73See supra note 2.74SeeCFPB 2013 Ann. Rep., supra note 39, at 15 (noting that the number of

complaints the FTC receives about debt collectors corresponds to only a small fractionof the overall number of consumers contacted). Complaints that collectors were seeking to


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categories: (1) debts that never existed; (2) debts that have been satisfied bypayment, settlement, or discharge in bankruptcy; and (3) time-barred debts.

A. Death because the Debt Never Existed

Its not my account should be a straightforward defense in acollection matter; however, some collectors continue their efforts, evenwhen provided evidence that they are contacting individuals who did notincur the debts.75 Media sources have labeled the process of seeking torecover the debt against the wrong person as debt tagging as collectorswill pin the debts of others on innocent consumers.

76The primary reasons

debts may not belong to an individual are mistaken identity and identitytheft.

1.

Mistaken Identity

Unfortunately, debt collectors often seek recovery from the wrongpeople.77 Despite protests from individuals that they are not the actualdebtors, collectors continue to call and send demand letters.78The mistaken-

recover debts that were either inflated or not owed were the number one complaint againstcollectors in 2012 and had also been the second ranked complaint against collectors was forcollectors for the years 2008-2011.Id.at 17. The percentage of overall complaints in thiscategory increased from approximately 30 percent in 2010 to nearly 40 percent in 2011.SeeCFPB 2012 Ann. Rep., supra note 59, at 8 & app. C. Similarly, a Better BusinessBureau study found that more than 50 percent of complainants claimed that collectors

contacted them about debt that they did not owe. BBB Study, supranote 60, at 3.75Sergei Lemberg,Debt Collection and Mistaken Identity, COLLECTION AGENCYMEDIA (May 10, 2012), http://collectionagencymedia.com/articles/debt-collection-and-mistaken-identity/.

76Elisabeth Leamy, 10 Tactics to Stop Rogue Debt Collectors in Their Tracks, ABCNEWS(Apr. 26, 2012), http://abcnews.go.com/Business/10-tactics-stop-rogue-debt-collectors-tracks/story?id=16220825;Debt Tagging: When You Get Tagged with SomeoneElses Debt May 2010 Newsletter, IDENTITY THEFT 911, 1, 3 (May 2010),http://idt911.com/~/media/Files/KnowledgeCenter/Newsletters/May2010Newsletter.ashx;Kathy M. Kristof, When Debt Collectors Go After the Wrong Person, L.A.TIMES,Dec. 19,2010, http://articles.latimes.com/2010/dec/19/business/la-fi-perfin-20101219; Sonja Ryst,'Debt Tagging' by Collection Agencies a Growing Problem, WASH.POST, Aug. 8, 2010,http://www.washingtonpost.com/wp-dyn/content/article/2010/08/06/AR2010080606237.html.

77Lemberg, supra note 75 (It may seem like a stretch, but debt collectors routinely goafter the wrong person and wreak havoc on their personal finances.);see, e.g, Bodur v.Palisades Collection, LLC, 829 F. Supp. 2d 246, 24749 (S.D.N.Y. 2011).

78Bodur, 829 F. Supp. 2d at 248. (Even though the collector knew that Ibrahim Bodurwas not the actual debtor, the collector continued to send demands for payment of debts toIbrahim Bodur, an individual who had a different social security number and address than


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identity defense in these actions does not involve fraud, but instead, anassertion that the collector is pursuing the wrong person because of someerror, typically in name, address, or phone number.79

For example, inJohnson v. Bullhead Investments, LLC80Elaine AnnetteJohnson alleged that for several years Bullhead Investments, LLC, acollector for First USA Bank, pursued her for a debt that apparentlybelonged to Elaine E. Johnson.81Despite her many statements to Bullheadand its counsel that the debt was not hers, that she never had an accountwith First USA, that she was not Elaine E. Johnson, and that she did notknow Elaine E. Johnson, the collectors continued to pursue the claim.

82

Even after she provided proof that she had a different social securitynumber, and Bullhead agreed to remove her from its mailing list, Bullheadsattorneys served her with a summons and complaint seeking recovery on the

First USA debt.

83

After suit was filed, Ms. Johnson sent additional evidenceto Bullheads attorneys that she never lived in Ohio where the alleged debtarose.

84Bullheads counsel purportedly refused to release the claim unless

she proved that she was not Elaine E. Johnson by filing an affidavit thatfraud had occurred.85 Unaware of any fraud, she refused to file a falseaffidavit.

86Eventually, Elaine Annette Johnson hired counsel who secured

summary judgment to dismiss the claim on the basis that she and Elaine E.Johnson were different people.87

In other cases, the FTC has filed complaints against collectors forknowingly pursuing claims against individuals who did not incur the

alleged debts.

88

For example, in United States v. Asset Acceptance, LLC

89

the actual debtor).79Leamy, supra note 76; Kristof, supra note 76.80Johnson v. Bullhead Invs., LLC, No. 1:09CV639, 2010 WL 118274 (M.D.N.C. Jan.

11, 2010). This case involved a hearing before the magistrate judge on the issue of whetherJohnsons complaint alleging that Bullhead Investments, Inc. and its counsel, Brock &Scott, PLLC, violated the FDCPA should be dismissed, or alternatively that certainparagraphs of the complaint be struck. The judge denied the motion to strike andrecommended that the court deny the motion to dismiss.Id.at *7.

81Id.at *1.82Id.83Id.at *12.84Id.at *2.85Id.86Johnson, 2010 WL 118274 at *2.87Id.88Amended Complaint for Injunctive & Other Equitable Relief at 7, Fed. Trade

Commn v. Capital Acquisitions & Mgmt. Corp., No. 04-C7781 (N.D. Ill. Apr. 11, 2005)


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the FTC alleged that Asset Acceptance, a debt purchaser and collector,knew that the portfolio of debts it acquired from Bally Total Fitnesscontained unreliable data, including inaccurate or missing Social Security

numbers.

90

As a result of the inaccurate data, Asset Acceptance tried tocollect from individuals who did not have agreements with Bally TotalFitness.91 In January 2012, Asset Acceptance agreed to pay a $2.5 millionpenalty to settle the action.

92 Additionally, in July 2013, Expert Global

Solutions and its subsidiaries, representing the worlds largest debt-collection operation, agreed to settle FTC claims that included allegationsthat collectors continued to call consumers even after consumers deniedowing debts.

93 The settlement included a record $3.2 million payment by

Expert Global Solutions.94

2. Identity TheftIn contrast to the defense of mistaken identity, identity theft involves

allegations of fraud. It occurs when a person steals another persons name,address, social security number, or other identifying information in order tocommit fraud.95 In these matters, consumers are not disputing that the

available at http://www.ftc.gov/os/caselist/camco/050411camcoamendedcomplaint.pdf;Complaint for Civil Penalties, Injunctive and Other Relief at 810,1618, United States v.Asset Acceptance, LLC, No. 8:12-cv-00182-T-27EAJ (M.D. Fla. Jan. 30, 2012) availableathttp://www.ftc.gov/os/caselist/0523133/120130assetcmpt.pdf.

89United States v. Asset Acceptance, LLC, No. 8:12-cv-00182-T-27EAJ (M.D. Fla.

Jan. 30, 2012) available athttp://www.ftc.gov/os/caselist/0523133/120130assetcmpt.pdf.90Id. at 16.91Id.at 1618.92Press Release, Fed. Trade Commn, Under FTC Settlement, Debt Buyer Agrees to

Pay $2.5 Million for Alleged Consumer Deception (Jan. 30, 2012), available athttp://www.ftc.gov/opa/2012/01/asset.shtm.

93Press Release, Fed. Trade Commn, World's Largest Debt Collection OperationSettles FTC Charges, Will Pay $3.2 Million Penalty (July 9, 2013), available athttp://www.ftc.gov/opa/2013/07/nco.shtm.

94Id.95Martha A. Sabol, The Identity Theft and Assumption Deterrence Act of 1998 Do

Individual Victims Finally Get Their Day in Court?, 11 LOY.CONSUMER L.REV. 165, 166(1999). A discussion of the causes and potential solutions for identity theft is beyond thescope of this article. For more information, seeLori J. Parker, Annotation,Legal and

Procedural Issues in Prosecutions Under Federal Statutes Relating to Offense of IdentityTheft, 4 A.L.R.FED.2D365 (2005); Lori J. Parker, Annotation, Validity, Construction, andApplication of State Statutes Relating to Offense of Identity Theft, 125 A.L.R.5TH537(2005). Instead, this article will address identity theft in the context of zombie debt whena debt collector recovers on a debt that the debtor did not incur, the collector has created azombie debt.


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debts were incurred in their names, but rather that others have stolen theiridentities to incur the debts.

Identity theft is a significant problem. In 1998, the Identity Theft andAssumption Deterrence Act (ITADA)96 was enacted as the firstcomprehensive effort to rewrite the federal criminal code to address theeffects of identity theft on individuals.

97The ITADA directs the FTC to

keep records of identity-theft complaints.98Over time, identity-theft claimshave continued to rise. In 2001, the FTC reported that 86,000 identity-theftcomplaints had been filed. In 2012, complaints had risen to about 370,000.

99

2012 marked the thirteenth consecutive year that identity theft wasrecognized as the number one complaint.100

The number of victims of identity theft dwarfs the number of filed

complaints. According to Bureau of Justice statistics for 2010, more than8.5 million American households, roughly 7 percent of households, werevictims of identity theft.

101 These numbers reflected an increase from 5.5

percent of households in 2005.102Misuse of existing credit cards has beenthe primary and most rapidly growing source of identity theft increasingfrom 3.6 million (or about 56 percent of victimized households) in 2005 to5.5 million (or about 64 percent of victimized households) in 2010.

103The

elderly are particularly vulnerable to this crime.104

Victims of identity theft not only have to deal with demands fromcollectors seeking recovery on debts they did not occur but also suffer

emotional damages and may spend hundreds of hours trying to repair theircredit and reputations.105

In 2010, the total economic loss of households due

96Identity Theft and Assumption Deterrence Act of 1998, Pub. L. No. 105-318, 112Stat 3007 (1998) (codified as amended at 18 U.S.C. 1028 (2006)).

97Erin Leigh Sylvester,Identity Theft: Are the Elderly Targeted?, 3 CONN.PUB.INT.L.J. 371, 376 (2004).

98Pub. L. No. 105-318, 5, 112 Stat 3007, 3010 (1998); Sylvester, supranote 97, at377-79.

99See2012 CSN Report, supra note 59, at 5, 6.100Id.; Press Release, Fed. Trade Commn, FTC Releases Top 10 Complaint

Categories for 2012 (Feb. 26, 2013), available athttp://www.ftc.gov/opa/2013/02/sentineltop.shtm.

101Lynn Langton, Identity Theft Reported by Households, 2005-2010, U.S.DEPT OFJUSTICE, 1 (Nov. 2011), http://bjs.ojp.usdoj.gov/content/pub/pdf/itrh0510.pdf.

102Id.103Id.at 2.104Sylvester, supranote 97, at 371.105Id.at 37374; R. Bradley McMahon, Note,After Billions Spent to Comply with


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to identity theft topped $13.2 billion.106

B. Death because the Debt Has Been Satisfied

I no longer owe the debt or the debt has been taken care of isanother common defense to a debt claim. Examples of this defense occurwhen an account has been settled or paid, or because the debt has beendischarged in bankruptcy.

1. Paid or Settled DebtsA debt may be extinguished if the debtor has paid it in full, or the

parties have agreed to release the obligation for less than full payment. Thedefenses in this category include payment, release, settlement, and accord

and satisfaction.

107

While there may be disputes about whether the defenseapplies, if it does apply, then collectors should not be able to collect on suchdebts. As with the mistaken-identity and identity-theft cases, the fact thatdebts have been extinguished by payment or settlement, has not deterredsome collectors from seeking recovery.108 For example, in Overcash v.United Abstract Group, Inc.109 although Larry Overcash received a letterfrom United Abstract that his credit-card debt of $1,353.15 was paid in full,United Abstract sold his account.110The account was then resold to otherdebt purchasers.

111American Credit, the ultimate purchaser of the account,

sought collection from Overcash in the amount of $41,701.58 and also

HIPAA and GLBA Privacy Provisions, Why Is Identity Theft the Most Prevalent Crime inAmerica?, 49 VILL.L.REV. 625, 62526 (2004).

106Langton, supranote 101, at 5.107A thorough discussion of these defenses is beyond the scope of this article. For

more information, seeVitauts M. Gulbis, Annotation,Modern Status of Rule thatAcceptance of Check Purporting To Be Final Settlement of Disputed Amount ConstitutesAccord and Satisfaction, 42 A.L.R.4TH12 (1985); Karen S. Harmatiuk, Satisfaction ofDebt by Payment of Less than Amount Claimed To Be Due, 35 AM.JUR.PROOF OF FACTS2D 735 (1983); R.E.H., Annotation, Trade Acceptance or Unsecured Note or Bill as Accordand Satisfaction, 62 A.L.R. 751 (1962); G. Van Ingen, Annotation, Payment of UndisputedAmount or Liability as Consideration for Discharge of Disputed Amount or Liability, 112A.L.R. 1219 (1938).

108SeeHolland supra note 23, at 270 nn.7579 and accompanying text (describingcases where collectors have sought recovery on paid or settled debt, including a situationwhere a collector sued on a debt that the collector had already settled).

109Overcash v. United Abstract Grp., Inc., 549 F. Supp. 2d 193 (N.D.N.Y. 2008).110Id. at 195.111Id.


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reported this amount to the credit bureaus.112

Judgment was entered againstUnited Abstract and American Credit for $5,155 which included attorneysfees and statutory damages under the FDCPA.113Similarly, in 2010 the FTC

settled a dispute with Credit Bureau Collection Services in which the FTCalleged that the company continued collection efforts against individualswho had presented evidence of payment or settlement.114

2. Debts Discharged in BankruptcyConsumers can also discharge debts in bankruptcy. The commencement

of a bankruptcy case typically stays collection attempts of creditors andcollectors.115Sections 727, 1141, and 1328 of the Bankruptcy Code outlinethe discharge afforded in chapters 7, 11, and 13 cases, respectively.116Section 524 of the Bankruptcy Code describes the effect of the discharge.

117

Under this section, an injunction will generally issue against the collectionof all debts except for those specifically listed as non-dischargeable by theBankruptcy Code or determined to be non-dischargeable by the bankruptcyjudge.118When granted, the discharge operates as an injunction against thecommencement of continuation of an action, the employment of process, oran act, to collect, recover, or offset any such debt as a personal liability ofthe debtor.

119

Despite this injunction, a market exists for claims discharged in

112

Id. The court does not explain the basis for asserting a claim of over $40,000 for adebt that was originally for less than $1,500, but the court states that the conduct wasrelatively egregious.Id. at 196.

113Id.at 197.114Plaintiffs Complaint for Civil Penalties, Injunctive and Other Relief at 45, United

States v. Credit Bureau Collection Servs., No.2:10-cv-169 (S.D. Ohio Feb. 24, 2010); PressRelease, Fed. Trade Commn, Debt Collectors Will Pay More Than $1 Million to SettleFTC Charges (Mar. 3, 2010), available athttp://www.ftc.gov/opa/2010/03/creditcollect.shtm.

11511 U.S.C 362 (2006). Of course, there are exceptions to the automatic stay, see 11U.S.C. 362 (2006 & Supp. 2010); however, the exceptions are beyond the scope of theissues discussed in this Article.

116Id. 727, 1141, 1328.117Id. 524.118Id.A detailed discussion about the extent and impact of discharge and the

dischargeability of specific debts involved in bankruptcy cases is beyond the scope of thisArticle. For more information, seeDavid M. Holliday, Annotation, Willful Violation ofDischarge Injunction Provisions of Bankruptcy Code 524(a)(2) and (3) (11 U.S.C.A. 524(a)(2) and (3)), 9 A.L.R.FED.2D431 (2006).

119 524(a)(2).


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bankruptcy, and purchasers do seek collection on such discharged debts.120

Furthermore, some courts have held that the injunction applies not only tothe collection of discharged debt but also to the sale of a discharged debt.121

C. Death because the Statutory Limitations Period has Expired

Unlike the defenses that the debt never existed or that it was satisfied,the limitations defense recognizes the existence of the debt but states thatthe passage of time creates a dead or non-enforceable debt. A preliminaryquestion is why should there be limitations periods for collection of debts?After all, the debtor presumably obtained money or services, so why shouldthe debtor be able to claim that he is no longer responsible for suchdebts?122

Limitation periods have existed for centuries.

123

As recognized by theUnited States Supreme Court, they are found and approved in all systemsof enlightened jurisprudence.

124They are rooted in concepts of efficiency

and fairness.125They protect the interests of potential defendants, the courts,and society. By establishing time frames for when suits must be filed,statutes of limitations encourage plaintiffs to bring suits in a timely mannerwhen evidence and witnesses are still available. They provide certainty forbusinesses and individuals against the indefinite threat of lawsuits.126In the

120Adam J. Levitin,Bankruptcy Markets: Making Sense Of Claims Trading, 4BROOK.J.CORP.FIN.&COM.L. 67, 81 (2009); Robert Berner & Brian Grow, Prisoners of Debt,

BUS

.W

K., Nov. 12, 2007, http://www.businessweek.com/stories/2007-11-11/prisoners-of-debt. Two of the top-ten debt buyers purchase only debts of consumers who have filed

bankruptcy. SeeFTC Debt Buying Industry, supranote 48, at 8 n. 37; FTC Workshop,supranote 37, at 6465.

121SeeLaboy v. Firstbank P.R. (In re Laboy), Bankr. No. 93-00753, Adversary No.09-00047, 2010 WL 427780, at *6 (Bankr. D. P.R. 2010);In reNassoko, 405 B.R. 515,52021 (Bankr. S.D.N.Y. 2009);In reLafferty, 229 B.R. 707, 71314 (Bankr. N.D. Ohio1998).But seeFinnie v. First Union Natl Bank, 275 B.R. 743, 746 (E.D. Va. 2002)(holding that sale did not violate discharge injunction); Guy B. Moss, The Risks ofPurchasing and Collecting Consumer Debt, 10 AM.BANKR.INST.L.REV. 643, 663 (2002)(describingLaffertyas stating the minority view).

122The characterization of a debt as unenforceable based on the passage of time doesnot remove the moral obligation associated with the debt. SeeRandy Sutton, Annotation,Moral or Natural Obligation as Consideration for Contract, 98 A.L.R.5TH 353 (2002).

123W.FERGUSON,THE STATUTE OF LIMITATIONS SAVING STATUTES46 (1978).124Wood v. Carpenter, 101 U.S. 135, 139 (1879).125Haneman, supranote 23, at 710 n.16.126Suzette M. Malveaux, Statute of Limitations: A Policy Analysis in the Context of

Reparations Litigation, 74 GEO.WASH.L.REV. 68, 75-82 (2005) (describing the policyreasons for limitation periods).


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consumer context, courts have specifically recognized the unfairness offiling suit after the limitations period has expired.127

Despite the importance of limitation periods, collectors often pursuetime-barred claims. One commentator has suggested time-barred debt iswhere the worst abuse has occurred towards the debtor.128 WhileMississippi and Wisconsin affirmatively provide that the passage of alimitations period extinguishes both the debt and the liability,129 in themajority of states, the rule is that the passage of the time extinguishes theliability but not the debt.

130Additionally, most courts have stated that the

federal FDCPA131

does not prohibit requests for payments on time-barreddebts as long as collectors do not file or threaten to file lawsuits.132

Despite the prohibitions on threatening or filing lawsuits, collectors

continue to threaten legal action, file lawsuits, and obtain judgments(primarily, default judgments) on time-barred debts.133 In the majority of

127See, e.g., Kimber v. Fed. Fin. Corp., 668 F. Supp. 1480, 1487 (M.D. Ala. 1987)(recognizing that for consumers, courts have adopted a heightened standard of caresufficient to support the least sophisticated consumer.).

128Andrew Martin, Old Debts that Wont Die, N.Y.TIMES, July 30, 2010,http://www.nytimes.com/2010/07/31/business/31collect.html?pagewanted=all (quotingJohn Pratt, a consultant to the debt-buying industry and an author of Debt Purchasing: AnInvestors Guide to Buying Debt (Morris Publishing, 2005)).

129MISS.CODE ANN. 15-1-3 (2012); WIS.STAT.ANN. 893.05 (West 1997).;Klewer v. Cavalry Invs., LLC, No. 01-C-541-S, 2002 WL 2018830, at *23 (W.D. Wis.

Jan. 30, 2002).130Haneman, supranote 23, at 71718.131FDCPA, 15 U.S.C. 16921692p (2006).132See, e.g.,Castro v. Collecto, Inc., 634 F.3d 779, 783 (5th Cir. 2011); Freyermuth v.

Credit Bureau Serv., Inc., 248 F.3d 767, 771 (8th Cir. 2001).But seeStepney v.Outsourcing Solutions, Inc., No. 97 C 5288, 1997 WL 722972 at * 5 (N.D. Ill. Nov. 13,1997) (petition stated a claim under FDCPA when collector knew it was collecting on atime-barred debt and letter threatened further collection action); Delgado v. Capital Mgmt.Servs. LP, No. 4:12cv4057SLDJAG, 2013 WL 1194708 at * 7 (C.D. Ill. Mar.22,2013 (petition stated plausible claims under sections 1692e and 1692f of the FDCPA whena collector sent demand letters for debts and requested settlement without disclosing thatthe debts were time-barred); see also Charles V. Gall, Proceeding with Caution: CollectingTime-Barred Debts, 56 CONSUMER FIN.L.Q.REP. 244, 24547 (2002) (discussing how animplicit threat of a lawsuit may be sufficient for liability).

133SeeFTC Debt Buying Industry, supranote 48, at 46. A legal provider in New Yorkclaims that more than half of the actions in its office were based on time-barred debt.Id.atn.192 (citing to Letter from Robert A. Martin, Assoc. Dir., DC 37 Mun. Emps. LegalServs., to the FTC (Feb. 11, 2010) (on file with the FTC). For scholarship discussing theproblems of litigating zombie debts, see infranote 24. This Article focuses on pre-litigationissues.


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states, limitations is an affirmative defense, so a collector can obtainjudgment unless the defendant raises the defense.134 Since most of thelawsuits result in default judgments, the defense is rarely raised.135

III.RESURRECTION OF DEAD DEBTS ZOMBIE DEBTS

Unfortunately, dead debts do not always remain dead. Like the re-animated zombies in the movies, dead debts can and do come back to life,creating nightmares for consumers.136Over the last decade, the incidence ofzombie debts has increased along with the growth of the debt-buyingindustry.

137 Understanding the creation and proliferation of these

resurrected debts is the first step in determining how to defeat them.

A. Becoming a Zombie Debt

As illustrated by the short story at the beginning of this Article, deaddebts can come back to life. Partial payments, acknowledgements, newagreements, and judgments are the primary mechanisms for resurrectingdead debts.

1. Partial Payment Revives Dead DebtsTypically, the last payment made on an account serves as the starting

point for the limitations period on a debt.138

After the statutory period hasrun, the debt is no longer considered enforceable in court.139In most states,

134FTC Debt Buying Industry, supra note 48, at 45; Haneman,supra note 23, at 729-30; see, e.g. M.R. Civ. P. 8 (Massachusettss rule establishing limitations as an affirmativedefense). Some states are now placing specific restrictions to sanction collectors who fileactions with reason to know that debts are time-barred. SeeSpector, supranote 24, at 270-71 (citing to North Carolina law (N.C.GEN.STAT.ANN. 58-70-115(4) (West 2011))making it an unfair practice for a debt buyer to sue on a time-barred debt).

135SeeFTC Debt Buying Industry, supra note 48, at 45. For more information aboutthe prevalence of default judgment in collection matters, seeinfranotes 179-187 andaccompanying text.

136Forbes, supranote 6.137For a discussion of the association between the growth in the debt buying industry

and the growth in the collection of zombie debts, see infraPart III.B.138FTC Broken System, supra note 53, at 24; Emily Grace, Out of Statute,

COLLECTOR,July 2011 at 40, available at http://www.digital-collector.com/collectormagazine/201107#pg42;FED.TRADE COMMN,CONSUMERINFORMATION,TIME-BARRED DEBTS (July 2013), available athttp://www.consumer.ftc.gov/articles/0117-time-barred-debts.

139SeeGall,supra note 132, at 244-45; Haneman, supra note 23, at 717.


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however, partial payment of a debt after the limitations period has run willrevive the debt and restart the limitations clock.140As a result, a collectorhoping to revive a time-barred debt may cajole a consumer into making a

small payment.

141

Typically, the collector will not disclose that she isseeking recovery on a time-barred debt.142The collectors goal may be toreset the limitations period, rather than the amount of the initial payment.143

The difficulty in determining applicable limitations periods compoundsthe problem for the uninformed consumer.144For example, what is thelimitations period that applies to a Texas resident who purchases clothing ata department store in Oklahoma by signing up for the merchants creditcard that a New York bank services?

Determining the appropriate limitation period for an unpaid debt often

begins with a complicated choice-of-law analysis.

145

Once the choice of lawis decided, the next step is selecting the appropriate period. Limitationperiods vary among the states,

146 and even within a particular state, the

140See FTC Debt Buying Industry, supra note 48, at 47; FTC Broken System, supranote 53, at 27; SAMUEL WILLISTON &RICHARD A.LORD,ATREATISE ON THE LAW OFCONTRACTS 8:31 (4th ed. 2000) (recognizing that part payment of a barred debtamounts to a new promise to pay the debt represents a generally accepted principle).For collection of cases discussing the issue of how payment revives the limitation period,see H. A. Wood, Annotation,Necessity and Sufficiency of Identification of Part Paymentwith the Particular Debt in Question, for Purposes of Tolling, or Removing Bar of, Statuteof Limitations, 142 A.L.R. 389 (1943).

141

Martin, supranote 128; FTC Broken System, supra note 53, at 27.142Martin, supranote 128; FTC Broken System, supra note 53, at 27.143Martin, supranote 128.144FTC Broken System, supra note 53, at 24.145Eli J. Richardson,Eliminating the Limitations of Limitations Law, 29 ARIZ.ST.L.J.

1015, 1027 (1997); Dudek v. Thomas & Thomas Attorneys & Counselors at Law, 702 F.Supp. 2d 826, 834-35 (N.D. Ohio 2010) (discussing choice of law issues). Choice of lawmay depend on a variety of factors including the forum where the action is filed, theresidence of the consumer at the time the action is filed, the residence of the consumerwhen the agreement was signed, and the language contained in the agreement between theconsumer and the original creditor. A detailed discussion of choice of law rules fordetermining limitation periods is beyond the scope of this Article, for more information seeSymeon C. Symeonides, Choice of Law in the American Courts in 2011: Twenty-FifthAnnual Survey, 60 AM.J.COMP.L. 291, 34042 (2012) (discussing the different choice of

law approaches for determining limitation periods). Symeonides provides a table thatidentifies the approaches taken by District of Columbia and 49 of the 50 states to limitationconflictsId.at 341. Louisiana follows a hybrid approach.Id.at 341 n.240; see also RobertA. Brazener, Annotation, Choice of Law as to Applicable Statute of Limitations in ContractActions, 78 A.L.R.3D639 (1977).

146Clinton Rooney, Defense of Assigned Consumer Debts, 43 CLEARINGHOUSE REV.


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characterization of the agreement between the creditor and the debtor canimpact the limitations period that applies.147 For example, should thelimitation period for contracts or sale of goods apply to credit-card debt? 148

Consumer debts typically fall within the following categories: writtencontract, oral contract, open account, or negotiable instrument.149Depending on the state, the limitations periods may vary significantly.150Finally, even after the choice of law and the applicable limitation periodsare chosen, the consumer is still confronted with determining when thelimitations period starts and whether the period has been tolled.151Given thecomplexity in determining limitation periods, it is not surprising thatconsumers are typically unaware of the appropriate limitations period for agiven debt.

2. Mere Acknowledgement may Revive Dead DebtsAdditionally, in many states acknowledgement of a debt, even without

payment, can restart the limitations period for a debt.152

For example, inFerguson v. Ingoldsby,153 the court found that, under Virginia law, adebtors email reply to a creditor was sufficient to qualify as anacknowledgement to revive an otherwise time-barred debt.

154The creditor

had emailed the following statement to the debtor: It is now time to takethis loan seriously and make arrangements to repay us, with interest,

542, 547 (2010) (describing that state limitation periods may range from under four years

to more than ten years).147FTC Broken System, supra note 53, at 24. For a general discussion of thedifficulties in determining limitation periods, see Richardson, supra note 145. AsRichardson describes, finding the applicable statute and divining the actual deadline for aclaim requires a confusing multi-step analysis.Id.at 102627.

148See Gall,supra note 132, at 248. The determination of the applicable statute maydepend on whether the merchant or a third-party provided financing.Id.(citing Hamid v.Blatt, No. 00 C 4511, 2001 WL 1035726, at *2 (N.D. Ill. Sept. 4, 2001)).

149Statute of Limitations on Debts, CREDITINFOCENTER.COM (Sept. 3, 2013),http://www.creditinfocenter.com/rebuild/statuteLimitations.shtml#2.

150Id. (providing a chart depicting the limitation periods for each state based on thetype of action); Rooney, supra note 146, at 547; see, e.g., Dudek, 702 F. Supp. 2d at 839-40 (identifying that if the debt is characterized as a debt on a written contract Ohiosfifteen-year period applies, while if the debt is treated as a debt on an oral contract a six-

year period applies).151SeeBrazener, supranote 145, at 10-11; Rooney, supra note 146, at 54748.152Goldberg, supra note 23, at 750; 51 AM.JUR.2D LIMITATION OF ACTIONS 291

(2012).153Ferguson v. Ingoldsby, No. 1:09cv739, 2009 WL 3763676 (E.D. Va. Nov. 5, 2009).154Id.at *4.


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immediately.155

The debtor responded: We cannot have a repayment planif we do not talk. Give me a time on Tuesday and we will get a firmrepayment plan in place.156 The court held that the debtors response

acknowledged the debt and indicated the debtors willingness to pay.

157

Asa result, the debt was revived.158

Given the impact of the acknowledgement on a time-barred debt, acollector may attempt to have the consumer recognize the existence of adebt, without identifying that the limitations period has run.159 One suchtechnique is to include detachable return stubs in demand letters.

160 The

stub will offer the consumer different options for payment terms. Byreturning the stub, the consumer, even without any payment, may haveacknowledged and thereby revived an otherwise dead debt.161

Although the general rule is that acknowledgements need not be inwriting unless required by statute, most states have adopted provisionsrequiring a writing to support an acknowledgement.

162Moral obligation to

repay a debt has been asserted as a basis for enforcingacknowledgements.163

3. New Agreements Replace Dead DebtsA collector may also revive a dead debt by offering a settlement that

will replace the purported debt.164

The settled amount becomes a new debtthat is enforceable against the consumer, even though the underlying debt

may have been unenforceable because it was a dead or non-existent debt.

165

Collectors may use the promise of additional credit as a method of revivingdead debts. The collector will offer to roll the old debt (or some fraction ofit) into a new credit-card debt. This new debt will now be enforceable

155Id.at *3.156Id.157Id.at *4.158Id.159Richard Rubin, FDCPA Claims Arising Out of State Court Collection Litigation,

THE CONSUMER ADVOCATE, JulyAug.Sept. 2008, at 19 n.22. The process of debt buyerstricking consumers into paying zombie debts is known in the industry as duping.Id.

160Id.161Id.162See WILLISTON &LORD, supra note 140, at 8:26.163HOWARD O.HUNTER,MODERN LAW OF CONTRACTS 5:17 (2012).164Weston, supra note 5.165Id.


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against the consumer, even if the underlying debt was previouslyunenforceable.166

Similarly, consumers may agree to pay unenforceable debts in order toclean their credit reports.167 Often consumers first become aware of deaddebts when they are trying to secure financing of homes or vehicles.168Atsuch time, consumers are typically under time pressure to close their deals.Attempts to have the debts removed from their credit reports quickly,however, are usually not successful. Collectors may ignore or deny theirrequests to clear up their credit reports, and instead try to recover thesedebts.

169 As a result, consumers will be pressured to pay unenforceable

debts for fear that they will not be able to obtain needed financing for theirhomes or vehicles.170

A related issue is the re-aging of consumer debts. Under the Fair CreditReporting Act,171 collectors reporting to credit bureaus are required toprovide the actual month and year when an account became delinquent.

172

This delinquency date is used to calculate the seven-year period for theamount of time that information remains on a consumers credit report.173Accordingly, even if the limitations period has expired, a debt may remainon a credit bureau report for seven years. This creates an incentive for aconsumer to pay a debt that would otherwise be unenforceable.174

Collectors, in violation of the Fair Credit Reporting Act may re-agedebts by submitting new delinquency dates that are later than the actual

delinquency dates.

175

This process allows the obligation to remain on the

166Carolyn Carter, Elizabeth Renuart, Margot Saunders & Chi Chi Wu, The CreditCard Market and Regulation: In Need of Repair, 10 N.C. Banking Inst. 23, 45 (2006)

167See, e.g.,Berner & Grow, supra note 120 (describing scenarios where consumersseeking to obtain home loans agreed to pay debts that were discharged in bankruptcy butstill appeared on their credit reports).

168Id.169Id. (some debt buyers may even change account numbers reported to credit bureaus,

making it even more difficult to clean the credit report of discharged debt).170Id.; Levitin, supra note 120, at 81 n.65.17115 U.S.C. 16811681x (2006).172Id. 1681s-2(a)(5)(A).173Weston, supra note 5.174Rebecca Lake, Should I Pay on a Time-Barred Debt?, EHOW.COM,available at

http://www.ehow.com/way_5743982_should-pay-time_barred-debt_.html (last visited July22, 2013).

175 1681s-2(a)(1); seeRex C. Anderson, Fair Debt Collection Practices Act A LawNeeding Updating?, MICH.B.J., Sept. 2010, at 28-29.


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consumers credit report beyond the seven-year period from actualdelinquency.176 In 2004, NCO Financial Systems, Inc., one of the nationslargest debt-collection firms, agreed to pay $1.5 million to settle FTCs

claims that it had improperly re-aged debts.

177

At the time, this was thelargest civil penalty under the Fair Credit Reporting Act.178

4. Judgments Replace Dead DebtScholarship has begun to address how collectors have used the court

system to convert dead debts to enforceable judgments.179

Debt-collectionsuits represent a substantial portion of the actions filed in state courts. Inmany courts, more than half of the civil cases filed are collection matters.180Consumers often do not respond to notices of lawsuits or of defaultjudgment hearings.

181 The failure to respond may be due to a variety of

factors including the consumers not receiving notices, not understandingnotices received, or fearing the time, expense, and potential loss if they dorespond.

182

Default judgments in consumer-collection cases are common with

176Anderson, supra note 175 at 29; Don Petersen,Night of the Living Debt,FDCPA.ME(Nov. 10, 2010),http://www.fdcpa.me/night-of-the-living-debt/; Weston,supra note 5.

177Consent Decree, United States v. NCO Grp., Inc., No. 04-2041 (E.D. Pa. May 13,

2004), availableat http://www.ftc.gov/os/caselist/9923012/040513ncoco9923012.pdf.178Press Release, Fed. Trade Commn, NCO Group to Pay Largest FCRA CivilPenalty to Date (May 13, 2004), available athttp://www.ftc.gov/opa/2004/05/ncogroup.shtm.

179This Article focuses on pre-litigation issues. For scholarship that has addressedmethods of dealing with zombie debt that occur with the onset of litigation, see supra note24 and accompanying text.

180FTC Workshop, supranote 37, at 55.181Id.at 57 (Perhaps the most significant issue related to debt collection litigation is

the prevalence of default judgments.).182Id.; FTC Broken System, supranote 53, at 7. Default judgments are particularly

disturbing when consumers are not provided proper notice of collection suits or defaultjudgment hearings. Debt Deception, supra note 50, at 6. This may even be the result of anintentional failure to serve consumers. The practice where process servers file false

affidavits claiming that service was made even though papers have never been served hasbeen dubbed sewer service.Id.; FTC Broken System, supranote 53, at 8 n.22. SeeAPPLESEED, DUE PROCESS AND CONSUMER DEBT:ELIMINATING BARRIERS TO JUSTICE INCONSUMER CREDIT CASES12 (2010) 10-13, available athttp://appleseednetwork.org/wp-content/uploads/2012/05/Due-Process-and-Consumer-Debt.pdf [hereinafter AppleseedReport] (describing the sewer service problem in New York).


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estimates ranging from 60 to 95 percent.183

Studies have shown that inmany of these cases, consumers had defenses to litigation or collection,including the dead-debt defenses of limitations, settlement, payment, or that

the debts did not belong to them.

184

Judgments give new life to the dead debts allowing collectors toseek collection on new obligations backed by a court order.

185 Judgments

may be enforceable for ten years or longer.186Additionally, with judgments,the collectors may have new and more powerful methods to obtainrecovery, including garnishment, judgment liens, and turnover orders.

187

B. The Rise of the Zombie Debt Collectors: The Association between theGrowth in the Debt-Buying Industry and the Growth in Zombie Debts

The development of the debt-buying industry has been accompanied byan increase in the complaints against collectors, including complaints aboutthe collection of zombie debts.

188Although concerns about the issues raised

by zombie debt existed in the 1970s,189the term zombie debt did not gain

183FTC Broken System, supra note 53, at 7; Haneman, supranote 23, at 717(Conservative estimates suggest that 70% to 90% of debt collection lawsuits broughtagainst unrepresented defendants result in default judgments.) An examination of a 365case sample from over 450,000 lawsuits filed by 26 debt buyers in New York Civil Courtfrom January 2006 through July 2008 found that only 10 percent of defendants filed ananswer. Debt Deception, supranote 50, at 1.

184SeeSpector, supranote 24, at 272. The author refers to one study showing that in

more than half the cases, consumers had good faith defenses to collection.Id.A study of365 cases filed by debt buyers in New York City found that 35 percent of the cases wereclearly meritless. Debt Deception, supranote 50, at 2. Additionally, one New York legalservice provider claims that at least half of the collection actions in its office were based ontime-barred debts. Letter from Robert A. Martin to FTC, supranote 133.

185SeeHaneman, supranote 23, at 710.186See, e.g., Ark. Code Ann. 16-56-114 (West 2005) (ten-year period); N.Y.

C.P.L.R.211 (Consol. 2012) (twenty-year period). A judgment may also be revived foradditional time. See, e.g., Ark. Code Ann. 16-65-501 (West Supp. 2011) (establishing aprocedure for using scire faciasto revive the judgment for another ten years).

187The Debt Collection Racket in New York, NEW ECONOMY PROJECT, 1 (June 2013),http://www.nedap.org/resources/documents/DebtCollectionRacketNY.pdf [hereinafterDebt Collection Racket]; Debt Deception, supra note 50, at 1; FTC Broken System, supranote 53 at 6; FTC Workshop, supra note 37, at 57 n.344. Unless the consumer can

demonstrate that the judgment was improperly obtained, she may be precluded fromchallenging the underlying debt obtained by a default judgment. FTC Workshop, supranote 37, at 57 n.344.

188Debt Collection Racket, supra note 187, at 1.189The topic of collectors seeking recovery on debts that were not owed or were time-

barred was part of the mid-1970s legislative history of the FDCPA. See infranotes 262-


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popular attention until after the rapid growth of the debtbuying industry.190

A causal connection between the development of the debt-buying industryand the increased incidence of zombie debts may be explained by

examining the information that debt buyers receive when acquiringcharged-off debts, the relative motivations of buyers and other collectors,and the competitive forces in the debt-buying industry.

1. The Impact of the Information Received by Debt Buyers on theCollection of Zombie Debts

Unrestricted sales of consumer debt have contributed to the growth inzombie debts. Sales are typically done on an as-is basis at deep discounts.Buyers often receive insufficient and inaccurate information aboutpurchased debts. As a result, it is not too surprising that buyers pursue debts

that may be time-barred, already paid, discharged in bankruptcy, ormisidentified.191

Understanding the process for purchase and sale of debts helps explainthe associated increase in complaints about the collection of zombie debts.Typically, sales are for charged-off debts that the seller has alreadyattempted to collect. Often, sellers will bundle these bad debts into largeportfolios so that even though the debts are sold at deep discounts, theamounts received from the sale of a large portfolio are substantial.

192

Charged-off debts are not only sold but also may be resold several times.193

Estimates are that as much as 50 percent of purchased credit-card debt is

resold.

194

The sale price of charged-off debt depends on several factors.195The age

269 and accompanying text.190Amy Fontinelle,Beware of Zombie Debt Collectors, FORBES.COM(Oct. 31, 2008),

http://www.forbes.com/2008/10/31/debt-creditors-default-pf-education-in_af_1031investopedia_inl.html.

191Debt Collection Racket, supranote 187, at 1 (Debt collection abuses stem largelyfrom structural problems related to the buying and selling of old, charged-off debts.); DebtDeception, supra note 50, at 5.

192See, e.g., FTC Debt Buying Industry, supra note 48, at 8. The study examinedapproximately 90 million consumer accounts with a total face value of approximately $143

billion that sold over a three-year period for about $6.5 billion. The average face value peraccount was about $1605.Id. at T-2.

193Kristof, supranote 76. The subsequent buyer of a debt will typically pay less thanthe previous buyer for the same debt. Debt Deception, supranote 50, at 5.

194GAO Report, supranote 53, at 29.195FTC Debt Buying Industry, supra note 48, at 22-24.


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of the debt and the number of times the debt has been sent throughcollection are the primary factors. Generally, the older the debt and themore times it has been sent through collection or resold, the lower the sale

price.

196

Similarly, the state where the debt is located can impact the saleprice.197Debts in creditor-friendly states, for example, those that liberallyallow wage garnishment, may have higher sale prices than debts in debtor-friendly states that restrict wage garnishment.

198

Although prices vary for purchased debts, the debts are typically sold atdeep discounts.

199 In January 2013, the FTC released a comprehensive

study of some of the nations largest debt buyers.200

As part of that study,the FTC examined 3,400 portfolios (consisting of over 75 million consumerdebt accounts) from six large debt buyers for a three-year period beginningon July 1, 2006.

201The study found that on average debt buyers paid four

cents per dollar of a debts face value.

202

The average rate ranged from 7.9cents per dollar for debts less than three years old to 2.2 cents for dollars fordebts that were between six to fifteen years old.

203Debts that were three to

six years old had an average rate per dollar of 3.1 cents, while debts overfifteen years were essentially free.204

Negotiation between the buyer and the seller focuses on the sale pricerather than the information transferred from the seller. As part of the sale,the buyer typically only receives summary data about the debts purchased.Such data is often provided on a spreadsheet or in a database that reflectsinformation such as names, social security numbers and amount owed.205

The 2013 FTC study found that buyers received the following informationon purchased accounts:

196GAO Report, supra note 53, at 28.197Id.198Id.; Fox, supranote 24, at 35960.199FTC Debt Buying Industry, supra note 48, at 22-24.200Id.The study was touted as the first large-scale empirical assessment of the debt

buying sector of the collection industry.Id. at i. The study examined nine of the topbuyers who purchased more than 75 percent of the debt sold in 2008. Id.at 8.

201Id.at 22. The study primarily focused on six, rather than the original nine, debtbuyers because one of the original nine stopped buying debt and did not provide data, and

two other buyers specialized in purchasing bankruptcy debt.Id.at 8-9.202Id.at 2324.203Id. at 24.204Id.205Debt Deception, supra note 50, at 5; Spector, supra note 24, at 267; Goldberg,

supra note 23, at 746; Holland, supranote 23, at 268.


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(1) over 98% of debt accounts included the name, streetaddress, and social