"Zombie debts," or bad debts that have been around for years, have a statute of limitations on when a creditor can sue for payment.
The statute of limitations varies by state, but it's typically six years for being sued, and seven years for the debt being reported on a credit report, says Shane A. McClelland, a consumer lawyer in Ohio who focuses on defending against debt collection. The range for most states is three to 10 years.
A debt collector who threatens to sue after the statute of limitations has expired is violating the Fair Debt Collection Practices Act.
There are a few ways the statute of limitations can be extended, and debt collectors can continue going after the debt even after the time has passed. They can still seek voluntary payment even though the law can't force a debtor to pay.
But collectors can't extend the statute of limitations and legally require debtors to pay by passing the legal rights to the debt to another collector, say McClelland and other attorneys.
Why zombie debts are chased after
Even if the statute of limitations has expired on debts, collectors can still legally seek the money, although they may have a harder time collecting it without a winning lawsuit in hand.
Some people want to pay off their debt, or they can be pressured by a collector to make payments and be scared of ruining their credit.
"Often times we see people come through our practice with a debt from 10 years ago, or a debt they thought was paid off years ago," McClelland says.
"In the end these collection companies bundle loads of consumers together and then sell them to third-party debt collection agencies for pennies on the dollar, to at least try to make some money off the collection efforts," he says.
How statute of limitations is extended
If the statute of limitations is about to expire and the bill collector convinces the debtor to make only a small payment, then the clock starts again on being required to legally pay the debt.
"Very rarely do statutes get extended," says Clint Sallee, CEO and president of Fidelity Creditor Service, a collection agency headquartered in Glendale, Calif. The reason is, Sallee says, is that people who make payments want to pay the debt off, and those who don't make payments don't want to pay the debt off.
With a court order obtained before the statute of limitations on debt runs out, debt collectors can attach assets of the debtor, such as garnishing wages, bank accounts and putting liens on homes.
"A judgment is going to be a little more powerful. It's going to be very valuable to creditors," says Colin Mabrito, an attorney in Houston, Texas, where the statute of limitations on debt lawsuits is four years.
The statute of limitations is also extended when a plaintiff wins a court order, with a judgment being good for 10 years, Sallee says. The judgment can be renewed every 10 years until the debt is paid, he says.
California has a statute of limitations of four years when a court order can be issued to pay a debt. The clock on when a lawsuit can be filed for a debt starts when services are rendered — such as the date of an ambulance ride that wasn't paid for — or the bank chargeoff date, Sallee says. The chargeoff is when a bank deems an account uncollectible, which is usually 180 days after the last payment.
When lawsuits are filed
A debt collector can send letters and make phone calls to debtors long after they've lost the legal right to sue, Mabrito says. During the time when they can sue, a debt for less than $1,000 is rarely worth suing over, he says.
"The older debt you get the less likely you are going to be trying to collect from them," Mabrito says, partly because the debtor is unlikely to pay something that they haven't paid for years anyway.
Some debts can take decades to recover, but can be worthwhile for collectors when late fees and interest charges are added up, says Sallee, the collection agency chief.
"It's a last resort. We'd much rather get the money without litigation," he says.
His company won a judgment in 1968 against a Southern California woman and put a lien on her property for an unpaid credit card debt of $1,756, Sallee says. It just recently collected the debt — totaling $68,000 with 10% annual interest charges since 1968 — when the woman died and her family sold the property that still had the creditor's lien on it.
Collecting on a property lien is rare because there usually isn't enough home equity to make a lawsuit worthwhile, he says.
Lawsuits can be dismissed if the time required to file a lawsuit has passed. Debt collectors can most easily win a lawsuit through a default judgment, meaning the defendant didn't respond to the suit.
"You don't want to let them get a default judgment against you," says Mabrito, a lawyer. "You want to defend yourself."