Resolving a legal or financial problem can be difficult. But imagine the surprise and frustration when a former debt obligation, retired long ago, rises again. Below are four of the common “zombie” debt scenarios that clients often encounter and how to address them:
- Divorce. Generally, in a divorce, a divorce decree or separation agreement will shift monthly credit obligations from one ex-spouse to another. Contrary to common belief, these court orders do not release either spouse of the underlying joint credit obligation. Only ones’ creditor can do that. So when one ex- spouse fails to make a payment to a joint creditor, a creditor can still sue both parties to the loan obligation for a loan default. Suggestion: In the event of an ex-spouse’s default, go back to court and try to enforce the divorce decree. Also, make sure to monitor the monthly payments carefully, and review a credit report frequently. Unless a creditor provides a written release, which seldom happens, be vigilant.
- Loan Guaranty. Many lenders and banks will require an individual to personally guarantee a loan. A loan guarantor cannot unilaterally revoke a loan guaranty. Tearing up or providing a written revocation of one’s personal guarantee has little effect, except to agitate the creditor. A guaranty only expires when the subject loan is paid off, or when both parties to a loan agreement mutually rescind or revoke the guarantee in writing. Careful: Make sure one’s loan guaranty specifically references the date and amount of the loan so that there is no confusion that when the loan is paid off, the corresponding guaranty is extinguished. Lenders have been known to attach otherwise old extinguished guarantees to newer or outstanding unrelated multiple loan obligations.
- Bankruptcy. When a debtor files bankruptcy under a Chapter 13 wage earner plan, they pay back their creditors according to a legal formula and court order. Mortgage balances and monthly payments can be reduced and unsecured credit card balances can be lowered by as much as 10% of the existing balances. But if a debtor fails to maintain payments according to court sanctioned payment plan, the bankruptcy can be dismissed. If dismissed, all of the debtor’s former balances on obligations will come rushing back to the debtor as if nothing had ever happened. The debtor starts at the beginning. Recommendation: Ensure that when filing a Chapter 13, that the proposed repayments are affordable. Check the payment history with the court frequently.
- Zombie debt. Each year, billions in unpaid bad consumer debt is written off by lenders. Often the right to collect on this bad debt is sold to collection companies. Some debt is so old that it is considered worthless. It is out of “statute’. This means that the legal right and time to collect such old debt has expired by law, and the debtor can no longer be pursued on the debt. Collection companies that purchase old debt do so in hopes to receive even a small payment from an unsuspecting debtor. This small payment resets the time limitation for collection back to the beginning and the obligation, or “zombie debt”, rises again.
It is important to maintain a safe place for legal documents and to monitor monthly payments. Banks, lenders, or title company maintain loan documents for their own benefit. So good record keeping is helpful to defend against retired obligations that reappear as unpaid obligations. Knowing the dates and amounts for loans and keeping releases and discharges of the same, in a safe place, can mean the difference of hundreds, even thousands of dollars, and so is vital to one’s financial and legal planning.
About the Author: Since 1990, David Soble has been a real estate and finance attorney in Ohio and Michigan. He advises national banks, lenders, loan servicers, consumers and business owners on residential and commercial real estate, finance and compliance issues. He has been involved in thousands of real estate transactions, being responsible for billions in real estate loan portfolios throughout his career. And while he may seem harsh, he has over 25 years of real estate battle scars to support his tempered cynicism.