David I Gensler, MSPA, MAAA, ACOPA, EA
Consumer-debt that is years or even decades old is known as “zombie” debt in the debt buying industry and represents a growing cause of concern for consumers. Just like real life zombies (that is probably an oxymoron) these “almost dead” consumer debts can see new life many years after they first saw the light of day. Consumer debt reached $13.67 trillion in the first quarter of 2019*. Consumer-debt cases rose 141% over a five year period in Texas. They rose 56% in Delaware, year over year and in New York City, it rose almost 100% over a two year period. Not surprisingly, default rates are up for credit cards, auto and student loans.
Companies in this industry purchase large blocks of delinquent consumer debts for pennies on the dollar. They may buy tens of thousands of names at a time. The older the debt, the less it costs to buy it. There is a high probability that the individuals no longer live at the address listed in the data base so acting almost as detectives they try and track down the consumer and collect the open debt. On top of the difficulty of finding people years later, as the debt ages, the companies need enough documentation to prove that the debt is legitimate. The companies that the debt was originated with (the banks, the mortgage companies, the auto loan companies, etc.) may be long gone and their records are gone with them. If the debtor can be located, the debt-buyers then vigorously pursue the consumers for the face value of the debt, plus interest and fees. Because the debts being purchased are so old, when interest and fees are added on to the original principal, the amount owed becomes exponentially larger. Most states allow debt collectors to obtain judgements, with interest up to 30 years later.
It is not unusual that the individuals being pursued have no recollection of ever borrowing the money and any paperwork they may have had has been lost to antiquity. Experts in the field say that many debtors are in the dark about the matter. Accordingly, when the lawsuits go to court, they often end up as default judgements in favor of the debtor because the defendants simply do not show up. Many who do show up are not represented by an attorney. They just cannot afford it. When granted, default judgements also allow collectors to garnish wages and attach liens to the debtor’s property.
The Wall Street Journal tells the story of a couple in Philadelphia allegedly defaulted on a $6,500 mortgage in 1983. Their debt was purchased by a debt buying company. By the time the matter finally reached the court in 2017, with interest, fees and penalties, the debt had ballooned to $83,000. The couple was adamant that they paid $4,500 in cash for the house and that there was no mortgage. In the 30 plus intervening years, the husband was now 93, blind and in poor health. His wife, who was tasked with defending the action, was 79. Fifteen months after they were first notified, facing foreclosure, the couple prevailed in court but only because the company could not prove that account documentation had been addressed to the defendants. No one can measure the stress that they were under while all of this played out.
What does any of this have to do with retirement plans? Well nothing and everything. Many people are unaware that assets in a qualified retirement plan are creditor proof. What was the only asset that O.J. Simpson had that could not be touched? His NFL pension. As long as the assets remains within the plan (or in most states, was rolled over to an IRA from a qualified plan) it is virtually untouchable. Once a distribution is taken however, the distribution becomes a personal asset of the consumer and is fair game.
Spouses are generally responsible for each other’s debts. A debt collection firm has the right to pursue an ex-spouse for the other’s debts even after they are divorced no matter which partner originated the debt. It would be comforting to know that your retirement plan assets (as long as the plan is properly maintained) are walled off from any creditors, wouldn’t it?
*Figures from the Federal Reserve
Based upon a July 6th article in the Wall Street Journal