Zombie Debt: Nightmare at the Closing Table
So, a quick survey — raise your hands if you screwed up your credit in your 20′s. You in the back — are you just stretching, or should I count you?
But you made good, right — or, at least, those debts are so old they can’t affect your credit report or score.
Muhahahahahaha….
The way US debtor laws are set up, bad debts older than 7 years are essentially illegal to report. Debts discharged by a bankruptcy court are unambiguously illegal to report. So, what happens when you’re closing on your first — or fifth — house, and that store charge card you defaulted on when you were 19 and lost your job at Barnes & Noble shows up?
The credit reporting agencies work for creditors, not debtors. There isn’t a mortgage broker or loan officer in the country who hasn’t sat down at a table to close a loan and had a deal go sour because something shows up — and usually at the last moment. It doesn’t matter if you’ve been a victim of identity theft, or been forced into bankruptcy because of unemployment or disability, or if you just screwed up. Zombie debt can reach its mouldering hand up through the floorboards, grab you by the ankle, and eat the brains of your — well, you get it.
Debt collection agencies are pretty sleazy as a rule, and many of them run afoul of federal law as a part of their mission statements. For instance, they write scripts that let their tele-goons insinuate that they’re going to sue you, or attack your assets, or garnish your wages, or file criminal charges against you, even though they have no right or intention to do those things. They exist to harass and frighten people into paying their debts, which might not be so bad if it weren’t so inhumane. And immoral. And illegal.
Practitioners of the dark art of Zombie Debt rely on people’s ignorance of credit law. The old debt shows up at the worst possible time — closing — and the customer pays — sometimes a debt she HAS ALREADY paid in full — or settles, or has to walk away from the table. It’s a bad time for the folks who’ve done all the work to get you to that closing table, including the mortgage broker who now has to be the bad guy.
Keeping track of your credit before and throughout your mortgage process is the only real defense you have.
If you see Zombie Debt, or get a collection notice, Validate the debt as your first action — a collection agency is NOT necessarily affiliated with the company you borrowed from in the first place, and you should NEVER, EVER give money to ANYONE but the company you originally borrowed from anyway.
Make sure you always see all 3 of your reports once per year at www.annualcreditreport.com , though if you’re in the market you should subscribe to a monitoring service that lets you see your report often — and that goes double if you’ve has past credit trouble.
(Thanks James, for the correction — freecreditreport.com is a credit bureau subscription service designed to direct you away from the free site to a PAY site. Sleazy, sleazy, sleazy! And it’s run by the major credit reporting agencies, not by Joey Bag-a-donuts!)
Validation will kill Zombie Debt, but not fast. But paying a dishonest collection agency perpetuates a cycle of consumer abuse that hurts the real estate market, wastes peoples’ time, and makes a lot of people — buyers, sellers, agents, brokers — miserable.
