Her name is Kathryn.



Every few weeks, I’ll answer the phone, and someone will want to talk to her. In fact, whoever is on the other end of the line will insist on talking to her. They assume that I am her, even when I inform her that I’m not and that I don’t know who she is. They threaten that if I don’t bring her to the phone, I’ll face “consequences”. Sometimes I’ll get two phone calls a day, every day of the week.

These debt collectors want Kathryn to repay some student loans, and every time her file is sold to a new agency, my phone number is transferred along with it – and I have to begin convincing a new bunch of folks that this isn’t the way to find her.

Halloween may be over, but the world of zombie debt is a year-round horror show. Aggressive collectors buy credit card accounts from original lenders like Chase or Bank of America that have been written off as in default and impossible to collect on. Having paid only pennies for every dollar owed to acquire these accounts, the new collectors have a big financial incentive to collect the maximum they can – it’s not about recouping money but about seeing how much they can make. Getting someone to agree to pay $1 for every $10 of debt owed could mean a 100% return.

Small wonder that a number of players in this space resort to abusive practices, and the Federal Trade Commission (FTC) announced last week a new nationwide initiative involving not only 47 attorneys general and many state regulatory agencies but also numerous local bodies and even a Canadian provincial regulator.

Operation Collection Protection will try to halt the industry’s worst practices – and it’s needed, says Edith Ramirez, chairwoman of the FTC.

“We receive more complaints about this industry than any other,” she told a press conference last Thursday, noting that debt collectors make a billion contacts a year with consumers. “The majority [of those] are legal. Many are not.”

With consumer debt climbing steadily, the problem is more likely to grow than to diminish. In 2010, Americans had total consumer debt of nearly $2.5tn, Ramirez said. Today, excluding mortgage debt, that figure is closer to $3.34tn (with mortgages added to the mix, it would be more than $11tn), and the average household has a credit card balance that stands at $7,281. When you consider the fact that many Americans don’t have credit cards or don’t carry balances, that average balance is actually much higher.

True, new rules mean that it’s harder for banks and credit card purveyors to get students to load up on debt, over and above their student loans. And more households are being more disciplined in how they use their credit cards, paying off their balance in full. But there also are some troubling signs, including the Federal Reserve’s survey results showing that of those Americans who carried a balance from one month to the next, more than half made only the minimum payment on their accounts. It’s those folks who are most at risk of ending up fielding calls from debt collectors down the road.

The FTC and its allies are to be applauded for their crackdown on abusive practices, including the shutdown of some firms. Ramirez recounted one extreme example to prove the need for the initiative: the debt collector called a teacher’s workplace and threatened to “pull her out of class” and “bring her down for questioning” because “she is under investigation for fraud”.

When the school principal’s secretary didn’t buckle under the pressure, the debt collector announced: “We’ll contact the students and let them know what the teacher is being accused of.”

It’s zombie debt that is the biggest, nastiest and most toxic part of this mess, however.

Officially, zombie debt is defined as money that someone once owed but has discharged in bankruptcy or has already paid off – or, in the case of so-called phantom debt, that an individual never owed at all.

And if you think the latter scenario sounds implausible, you may want to reconsider, suggests Lisa Madigan, attorney general of Illinois. The collectors “tell people that their wages are going to be garnished, they tell people that they are going to send people out to arrest them, they tell people their driver’s license will be revoked … their children will be taken away, lawsuits will be filed against them, that they will be put in jail unless they pay up,” she says. Exhausted and unable to cope, scared people pay “hundreds or thousands of dollars just to get these people to go away”.

If the debt collection industry is a disorganized mess, the “business” of zombie debt is just as terrifying as its moniker would suggest.

Buying and selling debt on the secondary market isn’t well-enough regulated, meaning that even when you think you are paying off, or have paid off, a debt to one collector, another could have the same file and insist that you pay the same sum to them.

It isn’t just shady guys in one-room offices that are doing this, either. Regulators just nailed JP Morgan Chase for trying to collect debt on accounts that it wasn’t legally entitled to, or for selling those accounts to other debt collectors. The original borrowers had already settled their accounts or paid them off, or had discharged them in bankruptcy. In some cases, this was true “zombie” debt: not even owed by the people whose names were on the credit card documents. And Chase lawyers filed fraudulent documents with the court. In light of those facts – and Chase’s status as the single largest consumer bank in the country – the $216m in penalties and fines looks like a slap on the wrist.

There are some measures that are encouraging, since they go beyond punishing abusive debt collectors to addressing some of the problems that keep zombie debt half-alive. Ohio senator Sherrod Brown introduced a bill last summer that would have required banks and debt buyers to tell credit agencies when a consumer discharged loans and credit card debt as part of a bankruptcy filing. The proposed legislation would give consumers the power to sue anyone who continued to report that debt for damages.

Some of the other steps that we can take are common sense. Check your credit report frequently, look out for accounts opened using your name and social security number, which might have been filched through database hacks, and be hyper-protective of your financial information.

If you’ve got consumer debt, and know you’re in trouble, be as proactive as possible: try to restructure it and look for a non-profit debt-counseling agency to assist. (Check the latter out with your state’s attorney general and consumer protection agencies.)

And if you do end up dealing with a debt collector, be aware of your rights. They can only contact you between certain hours, don’t have the right to call you at work if you tell them you can’t take personal calls there, can’t impersonate law enforcement personnel, and must give you information showing how much you owe and to whom the debt was incurred. They can’t discuss your debt with anyone but you, your spouse or your lawyer and shouldn’t contact a third party more than once in an attempt to obtain contact information for you.

So “Kathryn’s” debt collectors already have violated the law, repeatedly, by telling me what kind of debt they are collecting, how much she owes, and by calling me daily.

Ultimately, the problem is much larger than can be solved by a regulatory crackdown or Senator Brown’s proposed legislation. The vast majority of lawsuits filed by debt collectors against delinquent borrowers that ended up with default judgments – a judge handing down a verdict allowing the borrower’s bank account to be seized or wages to be garnished – turn out to target those living in low to moderate income neighborhoods. Almost none of the individuals affected were represented by lawyers.

Debt collecting is a high-growth business and it’s booming. Fair enough, if the reason for that growth is that Americans simply aren’t handling their debt well. But if it’s because the under-regulated industry is running amok, and spawning zombies right, left and center, it’s time to put a stop to it.