“Zombie Debt”: Obligation without Liability? — Aditi Bagchi

Post by Aditi Bagchi

John Oliver recently purchased and forgave about $15 million in medical debt.  (See https://www.youtube.com/watch?v=hxUAntt1z2c)  His objective was to draw attention to the dubious practices of debt collectors, as well as their “right” to buy information about people who once owed money and to try to collect money from them, even if the debt is no longer legally binding because the statute of limitations has expired.  (What I will refer to as expired debt is also known as “zombie debt.”)  If a debtor makes or promises an additional payment or admits obligation, the statute of limitations may actually be extended and the dead debt may be revived.

There is a fair amount of legislation to protect consumers from debt collectors.  Debt collectors may not discuss debt with debtors’ friends or family and they may not threaten to sue on debt that has expired.  Individuals have the right to demand that debt collectors not call at work or that they cease direct communications with the debtor all together.  A lot of the worst practices by debt collectors are already illegal.

But not all of it.  Why not flat out ban the sale of expired debt?  Why not impose hefty fines on any attempted sale of such debt, including transmission of debtors’ information?  And why not heftier fines on any attempt to collect expired debt?

It might not make sense to take these steps if we think people still owe payment on debt after the statute of limitations has expired.  “Moral obligation” cases in contract law imply just that, allowing that a promise to repay otherwise expired debt may be legally binding; the “moral obligation” of the original debt operates as a substitute for consideration.  If debt collectors are just trying to make people do what they are supposed to do, there is reason to permit their actions, even if we find them distasteful.

Does a person owe money that they are not legally required to pay?  Sometimes the answer is clearly yes.  Examples abound in many contexts outside of lending but consider the following.  A relative or friend lends money “to be paid back only if and when it makes sense for you” but declares the transfer to be a legal gift.  It will probably not be a legally binding debt but, if things go well for the recipient, she should repay.

It is hard to imagine that most consumer debt is like this, however.  One might take the view that there is never any bilateral moral obligation associated with consumer debt, only bare legal obligation, which expires with the statute of limitations.  More plausibly, one might acknowledge moral obligation that depends on the terms of the underlying legal obligation.  Its contours will depend on the motivations, expectations and pricing of the retail creditor, the life circumstances of the debtor, and the market in which they both operate.  The character of the obligation is not decipherable from the bare fact of a promise to repay.  Thinking about the consumer debtor’s obligations in terms of promissory morality obscures important differences among promises, even among promises to pay. 

It might be that whether we should permit debt collectors to sell or pursue expired debt does not depend on whether there is any moral obligation to repay it.  Perhaps disallowing sale of such debt is a justified prophylactic measure in the face of widespread abusive practices, or perhaps allowing sale of such debt helps to lower the cost of credit or to discipline borrowing.  But at present it looks like the idea of moral obligation to repay even expired debt may be doing some work in justifying existing policy.  In simple form that idea is mistaken, and our mistake comes at the expense of the most economically vulnerable members of our society.