Zombie Debts Are Hounding Struggling Americans. Will You Be Next?
This is what happens when the government targets you for zombie debt collection.
You receive a letter from your state’s department of human services claiming that you were “overissued” $4,132 in food stamp and cash benefits in the 1980s. Enclosed is a copy of the original overpayment notice they say they sent you when you were still listening to Madonna and Bobby Brown.
You don’t remember ever seeing it before.
The letter informs you that, since you didn’t respond immediately three decades ago, your 90-day window to request a fair hearing and contest the overpayment has closed. You now have a debt, and it’s past due.
The state threatens to refer this debt to the United States Department of Treasury, which has the power to withhold your federal tax return, your earned income tax credit, a portion of your military retirement pay – even your social security disability check. You are barely making ends meet, so the financial loss might mean doing without meals, a utilities shutoff, or skimping on medication.
If they can’t get the money from you, they will withhold your adult children’s tax returns. You read this correctly: the federal government will take your children’s money to resolve a 30-year-old alleged public benefits overpayment.
You have few options if you want to avoid this: you can pay the whole balance immediately, set up a monthly payment plan, or request an administrative review. But the process is impossibly Kafkaesque: you have to send evidence that you don’t owe the debt, so you’ll need to find three-decade-old pay stubs and household expense receipts. And who can do that?
If you’re lucky, you’ll eventually argue your case in front of an administrative law judge. But she’ll work for the very agency that sent you the letter.
You have no right to free legal representation, so if you can’t find a legal aid or pro bono lawyer, you’re entirely on your own.
With quiet but devastating regularity, zombie debt notices are arriving at the homes of tens of thousands across the US – courtesy of the government and with the assistance of heavyweight tech companies. The Guardian can reveal that predatory policy changes, turbocharged by digital innovations, are producing a wave of aggressive debt collection that stretches back decades and targets the nation’s most vulnerable.
Last year, Team 3335 found out about government zombie debt first-hand. The family calls themselves “Team 3335” because that’s the address of the brick-faced single-family home in Steger, Illinois, that shelters three generations: 50-year-old Star Kaminski, her three children and the family’s matriarch, 72-year-old Dreama Richardson.
When Dreama began to need more help with day-to-day chores, she and her daughter bought this modest place together, not far away from the public middle school where Star works as a librarian. It’s a little crowded, but Star sees that as a gift, not a sacrifice. She likes her family near; they meet life’s joys and challenges together.
Before the letter came, they were doing pretty well.
Then, last September, the Illinois department of human services, or IDHS, sent Dreama a letter claiming she had been overpaid $2,500 in cash assistance and $1,632 in food stamp benefits over a period of 10 months – in 1988 and 1989.
The agency alleged that Dreama failed to report teenaged Star’s income from a part-time job at Taco Bell, which pushed the household’s income over the earning cap for public assistance, making them ineligible.
Every 10 years or so since then, Dreama lost a tax return to service the “debt”, but she hadn’t heard from IDHS since 2007. Now, the state was looking to recoup the final $1,323 they said the family owed.
The household had 60 days to pay up, or they would withhold a portion of Dreama’s social security check – her only source of income – until the alleged overpayment was satisfied.
There was, however, a problem: in 1988 and 1989, Star wasn’t living with her mom or contributing financially to her household.
The “overpayment” was miscalculated. It was never a legitimate debt.
In the private market, a zombie debt is a debt that is past its statute of limitations, not owed, paid in full, or otherwise contested, yet which has found its way into the hands of a collection agency intent on pursuing payment by any means necessary.
Those agencies are known to harass, threaten and trick consumers into paying out-of-date private debts, which they buy for pennies on the dollar. In 1977, the Fair Debt Collection Practices Act was passed to protect people against the aggressive tactics collection agencies use – calling at all hours, contacting employers, deception, publishing debtors’ names – and to require that creditors prove that a debt is actually owed.
Unfortunately for Team 3335, the “overpayment” they’re battling is government debt; they enjoy none of these protections. If private zombie debt is surprisingly easy to kill – asking a collection agency for proof the debt exists can often make it vanish forever – government zombie debt is just the opposite, rising like a phoenix from the ashes of the most difficult times in people’s lives, over and over again.
When Dreama received the letter in September 2018, she almost agreed to pay. In her 70s, beginning to suffer from memory problems, and on a fixed income, the notice frightened and confused her. “I didn’t understand,” she told me. “They explained it to me, but I still didn’t understand. How do you argue with the government? How do you prove something from 30 years ago?”
Written in her spidery handwriting in the margins of the September 2018 invoice for $1,323.18 is a repayment plan suggested by an IDHS representative: “Due 15th of month,” it reads, “$25.00.”
Before she wrote her first check, one of Star’s daughters found a handful of articles written by Mark Brown for the Chicago Sun-Times describing other women in their 70s and 80s receiving notices about long-overdue public assistance overpayments. Star contacted a Chicago not-for-profit that agreed to provide the family free legal aid. With their support, Dreama filed an appeal against the 1989 household composition error that created the overpayment “debt”.
Dreama’s attorney submitted a number of documents supporting her case, including a signed affidavit from Star’s ex-husband attesting that she was not living with her mother when she was working for Taco Bell. The Illinois department of human services sent a casework manager to testify, but submitted no evidence.
The hearing officer found for the state.
Hearing officer Sheila King wrote in her decision that because Team 3335 filed their challenge more than 90 days after the “mailing of the first notice of the department’s action” back in 1989, “the Bureau of Hearings does not have jurisdiction”. She dismissed the appeal, allowing federal debt collection to move forward.
If Dreama paid for a vacation with a credit card and then refused to pay, the credit card company would have to sue in order to collect. They would have to serve her with a summons and provide proof that she had received it – they couldn’t just mail a notice and assume it found its way into her hands. She could demand proof that the debt actually existed and ask to see a record of any payments already made. In Illinois, the credit card company would have 10 years to file a lawsuit to collect the debt, one of the longest statutes of limitations in the country.
None of these protections applies to Dreama’s alleged public benefits overpayment. There is no proof she ever received the 1989 notice. The state offered no evidence that her “debt” was correctly calculated. They insist they can go on trying to collect it forever.
To Star, it feels less like lawful debt collection and more like intimidation. “You don’t have the means to defend yourself,” she said. “They’re big bullies.”
It is unclear if a legal mechanism for garnishing Dreama’s social security checks actually exists. But Team 3335 is still nervous. “We worry about how mom is going to do without her money,” says Star. “If she wasn’t living with me, I don’t know where she’d be. Without one of us, the whole deck of cards falls.”
“It’s robbery,” she says, “from our most vulnerable people – our seniors. And it’s just not right.”
Team 3335 is not alone. According to data obtained from the Illinois department of human services through an open records request, the agency sends out an average of 23,000 of these pre-offset notices every year.
Though the department denied in 2016 that there’s been any recent push to collect old debts, attempts to recoup are clearly increasing. In 2010, IDHS sent out 7,669 notices that they were referring overpayments to Treasury. In 2017, they sent 32,881.
Back in 1996, sweeping changes to the public assistance system shifted how the government views administrative error. Two new acts included provisions that redefined overpayments of any kind – whether due to agency mistakes, client error or fraudulent misrepresentation – as debt.
The acts expanded state agencies’ power to collect overpayments from future benefits, unemployment compensation and federal pay, pensions or income tax refunds. They also created new collection programs, including the Treasury Offset Program, or Top.
The process got a boost when, in the summer of 2008, the Farm Bill lifted the 10-year limit on collecting overpayments. That year, Top collected $3.3bn in federal non-tax debts, more than three and a half times the amount they collected a decade earlier.
And then, in December 2010, the Claims Resolution Act passed. This historic piece of legislation settled an unresolved court case in favor of 75,000 black farmers unjustly denied agricultural loans in the 1980s and 1990s. Ironically, tucked into its 801st section was a provision to increase the “collection of past-due, legally enforceable state debts”. It quietly expanded which debts could be referred to Treasury, from only those due to fraud to those resulting from unintentional errors.
At the same time, the Affordable Care Act of 2010 required states to consolidate and modernize their public assistance eligibility processes into streamlined, integrated digital systems.
The next year, in 2011, attempts by the Illinois department of human services to recoup overpayments rose by 475%. Over the next two years, collections soared. The addition of unemployment to the Top program in 2012 increased returns by $34.9m.
Then, in the same year, Illinois signed what would eventually be a $288m contract with the accounting and risk-management firm Deloitte to replace an older automated intake system with the Integrated Eligibility System (IES).
IES provides automated eligibility determinations for Medicaid, Snap and cash assistance. When the digital system processes claims, it searches various government and private data sources to verify income, household composition and other eligibility information, allowing the state to identify discrepancies that may be interpreted as overpayments. The state’s own auditors found in 2017 that IDHS “did not have appropriate controls” over IES: the system wasn’t following established policy, the agency couldn’t locate case files and other necessary documentation, 10-13% of eligibility redeterminations were overdue, and error-prone calculations were resulting in improper payments.
And yet, in 2013, Top collected $46.4m in Snap and unemployment debt for the state of Illinois.
So how do the tens of thousands of people Illinois department of human services accuses of receiving overpayments every year respond? Some, like 75-year-old Tim Pegues, do everything in their power to pay, even if it means skipping meals to try to make good on a debt created by the government’s mistake.
Pegues went through a rough patch in the early 2000s after a relationship disintegrated. He ended up unhoused. By the time his eldest daughter found him in Indiana, he had walking pneumonia. Back in Chicago and in the hospital, a social worker helped him apply for cash assistance and food stamps, which stabilized his life. “I was doing good,” he told me in July 2019. “I got a chance to get back on my feet. I got a roof over my head. I’m being a man. That’s when I got the letter.”
We sat together on red couches in the basement of his small, cheerful house on the South Side of Chicago. Pegues was relaxing under a poster featuring Malcolm X, Dr Martin Luther King Jr and Nelson Mandela shooting pool. Despite a significant disability – due to a childhood injury, one of his legs is two and a half inches shorter than the other – Pegues worked for 30 years as a truck driver and raised four children.
On 28 March 2003, he received a letter from IDHS warning he owed the agency a $7,866 overpayment. They openly admitted that the overpayment was their error. “The agency inadvertently issued you cash benefits you were not eligible to received [sic],” the letter said. Nevertheless, it was Pegues’s responsibility to pay up. If he did not, they threatened to refer his debt to a private collection agency or withhold his tax return.
In a panic, Pegues called and set up a payment plan: $5 on the 25th of every month. At that rate, it would take him 131 years to clear the debt. Even this modest payment was a significant loss for him. “A lot of people don’t think $5 is a lot of money,” he said. “But if you don’t have it, it’s like a million dollars. It could be a meal: a can of pork and beans, a loaf of bread.”
He wrote the check every month for the next 16 years.
Then, he saw Mark Brown’s articles in the Chicago Sun-Times and came to the same conclusion as Star and her family: he wasn’t alone. “Come to find out that there’s maybe hundreds of thousands of people,” he said. “Sounds like somebody got their hand in the cookie jar.” An email from Brown to IDHS triggered a review of Pegues’s case at the agency, and a few days later, he received a letter from the Bureau of Collections thanking him for his $5 payment in March 2018 and informing him that it was too late to appeal against the overpayment decision.
“Your only recourse,” the letter read, underlining the point for emphasis, “is to provide us with documentation to substantiate that your claims are not past due and/or legally enforceable or present your case to the circuit court.”
The letter concluded with a line Pegues interpreted as a veiled threat: “We will continue to accept your monthly payments. However, the agency will not accept your $5.00 payments as an official payment plan.” He was asked to call the office to “establish a repayment plan which will fit your financial situation” in order to avoid “future involuntary withholds as well as other collection action by the department of human services”. He called a lawyer instead.
With the attorney’s support, Pegues decided to stop paying the overpayment bill. He wrote his last check in June 2019. “The debt is still here,” he told me a few weeks later. “This’ll be the first month I don’t give them a dime.” I asked him how it felt to not write the check. “Good,” he said. “But I’ve been worried if they try to take my house away from me. I’m taking a chance, gambling. There’s a possibility that I could lose everything. It would be a shame for something I didn’t do.”
This is what puzzles Pegues most – why is he being held responsible for paying back an overpayment that the state admits is their fault? “The thing that I find is funny is that they told me what I was getting,” he said. “I didn’t pick it.” He had to be recertified as eligible to continue receiving benefits every six months. Each time the agency evaluated his case, they continued granting him benefits. “They kept on re-evaluating me, but they kept sending me money. Then I got that letter that I owe them $7,500.”
“You’re just barely swimming, and they put more water on you. And then they hand you a weight. It’s devastating. I’m 75, about to be 76, and the fights I’ve had wore me down. I’m tired. They keep saying you’re in the golden years, but I ain’t found no gold.”
It’s hard for a reasonable person to see the point in a government agency harassing an elderly man for $5 a month. After the cost of billing and postage, appeals and case management, Illinois is losing money collecting from people like Pegues. That’s why state and federal governments are looking to new economies of scale offered by advances in predictive analytics.
Technology companies – including industry heavyweights such as IBM, Oracle and Lexis Nexis – promise to use machine learning and artificial intelligence to change the fraud detection paradigm. In general, safety net programs operate on a “pay and audit” system, releasing benefits and then ferreting out the ineligible or dishonest with frequent interviews and recertifications.
The new systems promise instead to predict fraud before payment occurs.
For example, Pondera Solutions, a company based in Fulton, California, says it can search massive public and private databases, comb through social media and use proprietary (and secret) predictive models to rank every single applicant to a government program “based on their risk for fraud”.
In Illinois, increases in government zombie debt recoupment follow technological shifts as well as policy changes. After the 2013 peak in collections, returns declined: Top collected $133.3m that year, but only $101.2m in 2017. But collections began to increase again in 2018, after IDHS rolled out a major technology enhancement to the Integrated Eligibility System in October 2017.
For applicants, the upgrade has been plagued with problems. Tens of thousands of families didn’t receive their Snap benefits during that holiday season. By June 2018, the system had a backlog of 15,000 nursing home residents waiting for Medicaid eligibility decisions.
While digital eligibility is a nightmare for public assistance applicants, it has been great at chasing down dormant debts.
Andrew Dorliae, 44, lives in north-west Cedar Rapids, Iowa, in a neighborhood full of window tinting shops and Mexican restaurants. On his door is a sign that reads: “Trust in the Lord with all your heart.”
Before starting a home tax preparation business, Dorliae, a Liberian immigrant, was employed by Whirlpool Corporation, working his way up from assembler on a production line making refrigerators to inspector first class. In 2017, he took a $5-an-hour pay cut, from $21.43 to $17.40, to secure a weekend shift – 5am to 5pm every Friday, Saturday and Sunday – that allowed him to be at home with his children at night and to go to school during the week.
But in early 2018, Whirlpool closed the weekend shift. The company offered him a five-day-a-week overnight shift instead: midnight to 7am, Monday through Friday. Dorliae told his employer of more than six years that there was no way he could fill this shift: his wife also worked overnights and his daughter had a health condition requiring night-time care.
In March, he received notice from Whirlpool: he had been terminated. He applied for unemployment insurance benefits with Iowa workforce development (IWD) on 5 April, was found eligible, and received $490 each week in May. Then, Whirlpool challenged Dorliae’s initial unemployment eligibility, contesting their responsibility to pay a portion of his benefits. On 11 June, IWD conducted a fact-finding investigation that reversed the earlier eligibility decision, finding that Dorliae voluntarily left Whirlpool “without good cause attributable to the employer”.
In an instant, Dorliae was found ineligible for benefits he had already received.
In the end, Dorliae won his battle with Iowa workforce development and his “debt” was not referred to Treasury. “I appealed every decision they made,” he told me, gesturing towards an inch-high stack of correspondence sitting on the desk in his tiny home office, a meticulous record of his battle with the agency.
He firmly denies that he quit his job at Whirlpool. “They offered me a shift which I could not do,” he said. “I didn’t quit. My job let me down after all these years. You must survive until you get back on your feet. That’s what unemployment is for.”
Dorliae understands IWD’s need to investigate applicants and pursue those who might take advantage of the system. But he is puzzled why the burden of proof that they do not owe Iowa an overpayment debt should fall entirely on applicants, who have no right to free legal representation and must navigate a confusing appeal system alone.
“I applied for unemployment. You give it to me,” he explained. “Then, after the fact-finding, you tell me I owe. It doesn’t seem fair.” Giving back money you’ve already spent can be impossible for families with few financial reserves. Many low-income families plan their whole financial year around a tax refund. Losing it means not being able to fix the used car that gets you to work, no investment in education for the kids, not fixing the leaky roof or broken hot water heater. It is as if the agency is trying to take food back out of your children’s mouths, or, as Dorliae put it: “You owe what you have eaten.”
Reflecting on his experience, Dorliae said, “America is a good place. There is justice here.” But when I asked him if he would apply for unemployment again, he balked. “When they [investigate] you, you feel fear. It becomes very intimidating … I would be hesitant,” he said. “It is so demeaning.”
Despite Dorliae’s faith in the process, these are extraordinarily complex proceedings. His case was actually four cases occurring simultaneously. Dorliae had to keep track of each administrative law proceeding; meet deadlines for timely appeal; provide evidence of school schedules, commute times, medical conditions and communication with his employer; and attend near-constant telephone hearings. All for unemployment benefits totaling less than $3,000.
Dorliae is a paradigmatic tax professional: organized, detail-oriented, smart and confident in his ability to navigate mazes of legal and bureaucratic red tape. He did everything right, and he prevailed. But he is the exception and not the rule. Others I spoke to, like Kevin Christopherson of St Donatus, grew so frustrated and fearful that they just gave up.
Like Dorliae, Christopherson originally received unemployment benefits. An initial fact-finding confirmed his eligibility. Then his employer appealed and IWD reversed the eligibility decision. To Christopherson, launching another appeal seemed like an insurmountable hurdle. “It just seemed like they were all against me,” he told me in July 2019. “My mental state was really eating away at me. So I just forget about it.” Now he owes the state an “overpayment” of $2,275.
According to information gathered through an open records request, Iowa workforce development is currently using software provided by Lexis Nexis and Pondera to identify and pursue debts like Kevin Christopherson’s. For example, in late 2018, IWD ran the Pondera software to identify potential overpayments, and in October and November, sent out 20,000 “intent to offset” notices threatening to turn the debt over to Treasury for collection. Troublingly, in its contract with Iowa workforce development, Pondera characterizes “improper payments”, like Christopherson’s , as fraud.
The license for the Pondera software costs the Iowa workforce development $697,833.33 a year. Pondera also has claimed sizeable contracts in California, Georgia, Nevada, and Pennsylvania, and reported in 2016 that it had doubled its revenues several years in a row.
Andrew Dorliae fought the system and won. But was it a fair fight? Think of Team 3335. Imagine Dreama without her daughter’s help. Even with Star and an attorney in her corner, the possibility of Dreama’s social security check being garnished still looms. And what about Tim, who fears that any day they could come for his home?
For poor and working-class families, the financial burden of government zombie debt is potentially life-shattering. “If we want to stop evictions, we need to start paying attention to debt recoupment,” Alex Kornya, litigation director and general counsel at Iowa Legal Aid, told me. “The types of debts that tend to be the cause of evictions – perhaps more often than private consumer debts – are government debts, because the government can do more to you. They can cut more deeply into the reserves that you have to have to be self-sufficient.”
Representatives from the Department of Treasury and Iowa workforce development insist that the decision to enforce delinquent debt collection is a statutory mandate. “Once an agency certifies a debt,” a spokesperson from the Department of Treasury’s Bureau of the Fiscal Service wrote in an 11 October email, “the Fiscal Service is required by law to collect it.” Nicholas Olivencia, legal council for Iowa workforce development, wrote that “IWD, as well as every state, is required under Federal law to participate and enforce the Treasury Offset Program”. The Illinois department of human services did not immediately respond to a request for comment.
But agencies have more options than Olivencia suggests. The federal rules allow them to waive offset collection where it would cause economic distress. In fact, New Hampshire has done just this – in 2013, the state added a procedure to their administrative code so that individuals can request forbearance if a proposed tax refund offset will cause extreme financial hardship.
This option is open to all the states. “An individual may contact the agency if they believe the debt collection activity will cause financial hardship,” the Fiscal Service spokesperson wrote. “The agency may be able to compromise the debt or reduce the amount that can be offset.” But neither IDHS nor IWD has chosen to create policy that would allow forbearance or inform the public that the option exists. “[The agencies] made a conscious policy decision not to create a hardship waiver,” says Alex Kornya.
Perhaps it is hyperbolic to call the process of turning overpayments into debts extortion. And yet, the processes show disquieting parallels. As historian Joseph Bonica points out, the defining characteristic of extortion is the fear it produces, a terror so intense that victims feel compelled to give money “in exchange for emotional relief”. As he notes, this kind of rule by fear is simply despotism.
The fear that predatory debt collection produces is especially acute when the creditor is the government. It’s easy to feel like there is no remedy, no refuge, no neutral third party to whom you can appeal. That fear is amplified when your accuser is faceless and invisible, a few lines of computer code or a robot voice on the phone. Government zombie debt shifts responsibility for correcting systemic administrative incompetence on to the shoulders of our country’s most vulnerable people.
A people who feel preyed upon by government will not trust government. Those burned by predatory government debt collection will hesitate to use public services again, even when they are eligible and need agency resources to stay safe and healthy. This is not a negligible revenue gain; it is a debt we are accruing against our greatest national wealth, our people. And it is fast compounding interest.
Virginia Eubanks is the author of Automating Inequality: How High-Tech Tools Profile, Police, and Punish the Poor. She lives in Troy, New York.
Co-published with The Guardian.