Zombie Debt: Key Points for Small Business Owners

Much like the “undead” beings of folklore, “zombie debt” is old debt thatsprings back to life. It can be an issue if you’ve had past problems with unpaid debt, or if you or your business have experienced an issue that’s put your credit history at risk.  Either way, zombie debt poses a challenge when you’re growing your business.

Take a deep dive into what zombie debt is, different types of zombie debt, how it can impact your business, and steps you can take if it arises. As always, reach out to your attorney or one who specializes in debt collection for legal advice and guidance.

What is zombie debt?

Zombie debt is past debt that’s no longer legally collectible. Either the statute of limitations has passed, the debt has been paid off in a settlement, it’s been discharged through bankruptcy, or it’s otherwise no longer collectible.

Debt-collection agencies that buy old debt sometimes purchase debts that meet the criteria as “no longer legally collectible,” and  attempt to collect it anyway. When that happens, if the debt collector succeeds in getting you to acknowledge the debt or make a payment, this can trigger a situation where the debt springs back to life and becomes collectible again.

A key step in protecting yourself is to know what kinds of small business debt can become zombie debt. They include, but aren’t limited to:

  • Discharged debt: This is debt that has been cancelled due to bankruptcy. It’s important to know that not all debt can be cancelled as a result of bankruptcy. If you declared bankruptcy in the past (or are considering it as you move forward), consult with your lawyer to be sure you’re clear on how your debts and credit are impacted.

  • Settled debt: This is debt that’s been considered paid after negotiations to settle the debt for less than the original outstanding amount. Depending on the debt, you can try to negotiate debt settlement with creditors or a third party can be hired to negotiate for you.

  • Time-barred debt: Time-barred debt is no longer considered collectible because it’s been outstanding beyond a specific statute of limitations. Not all debt is time-barred and what qualifies as time-barred will vary by state and debt type.

  • Debt due to identity theft: Identity theft, hacks, and hijacks are increasingly common. If you’ve had debt incurred from these circumstances, you’re usually not obligated to pay it, although you have to take specific steps to prove the debt isn’t yours. However, this type of debt can still fall into the hands of debt collection agencies.

How zombie debt can impact your business

As a business owner, you have to stay on top of both your business and personal debt to keep your credit score high and credit history strong. This is critical for your day-to-day operations and when you apply for financing. Keep the following in mind:

  • Small business debt can fall into the zombie category if old, unpaid business debts meet the previous criteria.

  • Personal debt that becomes zombie debt can make it difficult for you to secure financing and credit for your business. Your personal credit history is an important consideration when you’re applying for loans and credit for your business.

  • It’s difficult to focus on profitability and growth when debt collectors are harassing you, especially if the debt was paid off, invalidated, or charged off long ago. This can lead to unnecessary stress and actions that can make the problem worse.

Types of zombie debt specific to small businesses

Each type of debt has a lifecycle. It begins when you’re approved for and accept the debt obligation. The life of the debt continues until the debt is paid in full (the best outcome) or the debt is written off (the outcome you want to avoid).

When a debt is written off, it’s because the lender (or a court) has determined that, it’s not likely to be paid back as promised. This typically occurs through bankruptcy or when a statute of limitations has passed.

However, third-party debt collectors will purchase these old debts at deeply discounted rates, knowing there’s a chance that they can get someone  to acknowledge the old, past debt. If they do, it’s usually enough to enable debt collectors to revive collection efforts.

Here are common types of past debt that can become zombie debt for small businesses. This list doesn’t include everything, so if you have old debt that’s been written off or settled, be aware that it can also fall into this category:

  • Unpaid invoices: These are debts you owe for receiving goods or services, but the supplier or vendor was never paid. Over time, these unpaid invoices may be written off as uncollectible, but they can resurface if a collection agency purchases the debt.

  • Loans and lines of credit: Business loans, lines of credit, and credit cards fall into this category when they’re written off or otherwise considered settled, such as through a business bankruptcy. These can resurface and be pursued by collectors.

  • Commercial-lease obligations: Even if a lease has been canceled due to bankruptcy or written off, if the old debt is purchased by debt collectors, it can become zombie debt.

  • Utility bills: If you have outstanding utility bills for a location you’re  no longer in or bills that were disputed and not resolved, they can also resurface as zombie debt.

What to do if zombie debt becomes an issue for your business

If your business is contacted by a debt collector, don’t admit liability. Instead, get the following information:

  • the debt collector’s name
  • the name and contact information of the agency or attorney they work with
  • the name of the original creditor
  • the amount of the debt
  • the date of the debt.

This gives you an opportunity to verify whether the debt is legitimate or zombie debt.

Then, contact an attorney who can give you protection and legal guidance. Together, you can develop the best strategy for your situation. This could mean having the attorney act on your behalf to get the debt collector to cease and desist, paying the debt (if it’s deemed valid and financially viable), or negotiating a settlement.

While individual rights regarding debt collection are protected under the federal Fair Debt Collection Practices Act, there isn’t similar federal guidance for businesses. However, there are some resources that you can consult, including:

  • State laws: Every state has laws governing business-debt collection practices. It’s helpful to become familiar with the laws in your state, especially if you think you could become (or are already) entangled in zombie debt.

  • The Uniform Commercial Code (UCC): The UCC is a set of laws governing commercial transactions that are applied uniformly across the U.S. states. Creditors can file UCC-1 filings to obtain rights to collateral.  

  • Commercial Collection Agencies of America (CCAA): For member agencies, the CCAA sets ethical standards and practices for commercial (business-to-business) debt collection. However, commercial collection agencies that aren’t part of CCAA have no obligation to follow CCAA’s best practices.

Understanding zombie debt is the first step to keeping it behind you

Everyone has past challenges that we’d prefer to keep in the past. Knowing what zombie debt is, the kinds of past bad debt that can become zombie debt, and what can trigger a reset will help you protect you and your business. Armed with that information, you’ll know to seek legal guidance on how to put your zombie debt to rest.

And when you’re ready to refocus on strengthening your business’s financial foundation, Pursuit has educational resources, business loans, and a business line of credit that can help you achieve your dreams. When you apply with us, we look at more than just your credit score. We consider your vision for your business’s future, as well as where you’ve been. Take a look at our offerings, then contact us to learn more.

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