Are Debt Purchasing Companies Plaguing You With Zombie Debts?

Zombie Debt Scenario #1:

An elderly widow sits freezing in her flat. She is trying to pay off a £2,000 debt before she dies, because she’s frightened that the debt will be passed on to her children if it is not cleared. The shame of that happening dominates every hour of her waking day, and enters her dreams at night. She has worked out that if she does not use her heating and skimps on food “a bit” then she’ll be able to pay off the debt in three years, and hopefully survive till then.

Zombie Debt Scenario #2:

A single mum struggling with two restless children and trying to balance their needs with a full time job is paying a disproportionate amount of her income trying to service a debt of £6,500 which has accumulated when she became unemployed from a previous job three years ago. She fears any future employer looking at her credit record held by Equifax or Experian, which she knows will list the CCJ against her for another 6 years. One of her ambitions is to pay off the debt completely and wipe the offending judgment off her file.

Zombie Debt Scenario #3:

The family which has unsecured debts of £16,000 accumulated over the years. They decided to deal with the various unsecured debts (credit cards, a store card and the overdraft) four years ago by consolidating it into a secured loan, but defaulted on this loan a year later when the expected promotion didn’t come through and their third child was born. The debt was sold to “one of those debt collecting companies” at that time and they’ve been paying £170 a month to this company and hope to clear this in five years. The debt company are really nice: they’ve agreed to freeze the interest. Imagine how terrible life would be if they hadn’t done that!

The problem with all of the above situations is that the debt no longer exists. The people described in these fictional descriptions of real-life misery are all trying to service a debt which has been written off by the original lender, a so-called zombie debt.

The original lender has written off the bad debt. HMRC, the tax office, has recognised this by giving them a small tax break on their business loss. Therefore no less an authority than the Crown recognises that the debt no longer exists.

Yet there must be hundreds of thousands of people in the UK alone – perhaps even millions – who are servicing debts which no longer exist. Each one of them is doing so because of a widely entrenched belief that some point of “honour” is being served in paying money every month for these written-off zombie debts.

The whole system becomes even more bizarre when we realise that the debt purchasing company has paid the original lender pennies on the pound for title to the debtor accounts. So, for example, let’s take a bad debt of £2,400 on a credit card. The original borrower has fallen on hard times and has defaulted on the monthly payments. Once the bank has decided that this is a lost case it sells it to a debt purchasing company (such transactions are in job lots of hundreds or thousands of such debtor accounts at the same time) for, say 8 pence on the pound.

So the debt purchasing company buys the £2,400 debt for £192. They are now the new owner and should, by law, send the debtor what is known as a Letter of Assignment announcing the fact.

Yet this new owner, the debt purchasing company, is still pursuing the debtor for the full amount: £2,400!

Sidenote: There is an earlier stage in the origin of the debt which makes the whole zonbie debt idea even more untenable, unjustified and just plain crazy, and that is the Fractional Reserve System.

All banks use what is known as the Fractional Reserve System (or Fractional Reserve Banking) and this is how banks have operated for generations. It’s how banks work.

When a bank lends you money it does not actually lend you its own money, as most people believe (nor does it lend you anyone else’s money). All that is required is that the bank have at least 10 percent of the loan sum in its deposits (or reserves) in order to complete such a transaction. The bank obviously has that amount, so that’s okay. The bank then creates your loan account and then CREATES – there is no other word for it – the money which is the loan.

The loan has been created from nothing. One minute it wasn’t there. The next minute, by the authority of the bank, it is there, in your loan account.

The loan has therefore been created with no loss to the bank. By giving you this money they are not inconveniencing themselves in any way. Yet you are now legally responsible for paying that money back to the bank (which wasn’t theirs in the first place) PLUS a large amount of interest over the years. You have to do this by law. If you default on this then bad things will happen to you. If the loan is secured, or if the loan is a mortgage, then the bank will take your house from you if you default for more than a number of months.

Remember, this money did not belong to the bank in the first place. It would be most accurate to say that the bank had authorised its creation, because that is what banks do. And that is how banks make their money.

In an odd sort of way, the bank is lending you your own money….

Anyway, that is how the loan comes to exist.

The Three Stages Of A Zombie Debt

Now we can see the three stages of the zombie debt:

  1. The bank creates the loan amount from nothing and you must start paying it back regularly and with interest.
  2. You default on the loan and it becomes a “bad debt”.
  3. This debt account is sold to the debt purchasing company for pennies and they then pursue you for the full amount. At around this time the original debt is written off by the taxman and the bank compensated for their “loss” according to law.

In view if the fact that everyone in the debt purchasing industry knows that the account is going to be written off at some stage, it is not strictly true to say that the bank (or original lender) had sold the debt to the DPC. It is more accurate to say that the bank sold the DATA relating to the debt to the DPC.

In some cases this data is very patchy. Sometimes there is only a name and telephone number, or just a name and address, and the DPC has to take it from there by using their cunning and wiles so that they can begin their campaign to get the full amount of the original debt from the original borrower. In such cases, where data supplied from banks is bad, the zombie debts come very cheap.

Other cases where the debt can be bought by the DPC very cheaply is where the debt is old. The nearer it is to being what is known as Statute Barred the cheaper it gets.

(Statute Barred debts are debt accounts which have been dormant for over six years, after which they cannot be pursued, by law, although the law can be a bit tricky as to what exactly constitutes a Statute Barred debt. For example, if a debt is five years old and the bank or DPC writes to you about it and you write back, then the clock starts ticking again, because you have acknowledged it and it is therefore not dormant. Also, debts which would otherwise be statute barred which are themselves the subject of a Court Order cannot be considered statute barred and do not come under the terms because of the Court Order. There are other matters which can affect the status of statute barred debts.)

It is possible for a DPC to buy a job lot of old debts (which have been written off years previously) extremely cheaply, but by wiles, cunning and bits of plain old trickery make a good profit out of them. Zombie debts can come in all shapes and sizes.

Some DPCs will use the law to good effect if the debtor is a homeowner. The DPC can secure the debt on property (your property) by means of a Court Order or CCJ and that means that if you don’t pay them what they want for it the DPC can then apply to the Court for an Order For Sale or an Order For Possession and make you homeless, while pocketing from the proceeds of your house.

Zombie Debts & DPC Law Firms

Most debtor accounts are unsecured (like credit card accounts, store cards and personal bank loans, etc.) but by means of a CCJ the DPC can convert you unsecured loan into a secured loan and then your life becomes a bit more nightmarish.

A symbiotic relationship between a DPC and a lawyer is useful; sometimes all it takes is a lawyer’s letter or a threat of court action to make the victim cough up. Some debtors even decide to sell their own houses to pay the unsecured debt, so great is the threat of the CCJ.

Several DPCs share premises with these “letterheads for hire” lawyers. Some DPCs set up, or own, law firms whose sole function is to convert unsecured loans into secured loans for the above reasons. Some DPCs like to keep a distance from the law firm, though examination at Companies House will show that both the debt purchasing company and the legal firm are owned by the same people.

Sometimes there is no ownership relationship, but the DPC uses a specific law firm for its legal work on a continual basis, for any number of reasons.

Whatever the relationship, the profits resulting from this unholy relationship between DPC and single-purpose solicitor is enough to justify the DPC having the solicitor there in the first place.

Isn’t it amazing that a debt is the only thing, apparently, that can be written off then come to life again. Imagine if that were to happen in the second hand car business. Imagine someone buying a lump of metal which has just been squashed and tried to sell it to you at the price of a new car. You’d have a good chuckle. Now imagine if the law was on the side of the spiv trying to get you to buy the squashed auto for the full asking price, and it turned out that you were obliged to buy this nonsense or the spiv could apply to the court for your home to be taken away from you.

Because that’s how the law stands at the moment….

Legal Notice

The advice and opinions given here about Zombie debts are for informational purposes only. They are offered informally, without prejudice and without liability. Use your own judgement and use due diligence. You are advised to seek the advice of a qualified, insured professional. We take no responsibility for any undue or adverse circumstances or results which may arise from your following the information on this website or on any of the subdomans adjacent to this website.

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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