In Short
When recovering a debt from an individual in Australia, you should begin with informal contact and progress to formal demand letters before considering legal action. Court proceedings may be necessary if the debtor refuses to pay, but you must weigh the costs against the debt amount and the individual’s ability to pay. If successful in court, you can enforce the judgment through various means, including garnishing wages or seizing assets.
Tips for Businesses
Contact the debtor promptly to discuss payment arrangements and document all communications. Issue a formal letter of demand giving at least 21 days for payment. Conduct searches to verify the debtor’s financial position before commencing court action. Consider the debtor’s capacity to pay when deciding whether to pursue legal proceedings. Ensure you comply with time limits for commencing debt recovery action.
Summary
This guide explains the process for businesses to recover debts from individuals in Australia, covering both informal and formal recovery methods. LegalVision’s business lawyers specialise in advising clients on debt recovery procedures and enforcement options.
Although chasing unpaid debts is frustrating, it is a common part of doing business. There are steps you can take to recover a debt without having to resort to court proceedings. However, these alternative steps can significantly take away time and money from your business and do not guarantee that you will get paid. This article will set out the steps you should take to give you the best chance of recovering some, or even all, of the money you are owed by an individual.
1. Get in Touch
An individual who owes you money is called a debtor. The first step in trying to recover an unpaid debt from a debtor should always be following them up by email and phone. It is possible they have missed the due date for payment or lost the original invoice in their email inbox. You should send a polite, follow-up email and attach another copy of the invoice. If they do not respond, you should follow this email up with a phone call to ask when they expect to be making the payment. If they are unable to make the payment for some reason or dispute the amount that is owed, you will have a clear understanding of what your next steps should be.
This guide provides key information on how to manage a business dispute as quickly and cost-effectively as possible.
2. Send a Letter of Demand
If you have not received a response or payment after following up with the debtor with an email and a phone call, you may need to issue a formal letter of demand. A letter of demand is a formal request, usually written by a lawyer, that demands the payment of a debt. You can send this yourself, or arrange for a solicitor to send it. The letter should clearly set out:
- the total debt owed;
- a confirmation that the goods or services, subject of the debt, were provided;
- a final date for payment; and
- what action you will take if the debtor does not make payment by the specified date.
3. Consider a Settlement
If the debtor responds to your demands by disputing the debt or claiming that they cannot pay in full, you may wish to consider a commercial settlement as your next step. A commercial settlement will involve the parties renegotiating the debt to make it more realistic for the debtor, as a compromise of the original debt. For example, you may agree to accept:
- a lesser amount in the final settlement of the debt; or
- payment via a payment plan over an agreed term.
It is important to record any agreement or payment terms in writing. This is to prevent any future disputes about the debt from arising. Importantly, you should give serious consideration to settlement negotiations, even if you disagree with any dispute raised by the debtor and believe they owe the debt in full.
4. Go to Court
Initiating legal proceedings to recover an unpaid debt should always be a last resort. Court proceedings are time-consuming and expensive. Even if you do not use a lawyer, going to court will cost you time away from your business. Legal proceedings are also risky. This is because even where you believe you have a strong case, you may not succeed if the debtor disputes the debt owed. If you decide to commence legal proceedings, the outcome will depend on whether:
- the debtor does not file a defence or pay their debts. In this case, the court will grant a default judgment, requiring that the debtor pay the amount owed;
- the debtor files a defence and the matter goes to a court hearing whereby you are unsuccessful. The court may order you to pay the legal costs of the other party; or
- the debtor files a defence and the matter goes to a court hearing whereby you are successful. The court will make a judgment debt. This is where the court makes an order about the amount you are owed, which will include the original debt, plus your legal costs.
5. Enforce a Judgment
Once you have a judgment debt, you can take steps to enforce that judgment by using the legal system to force the debtor to pay you the money owed. These steps can include:
- seizing assets or property owned by the debtor;
- enforcing a garnishee order on their salary or bank account; or
- applying to make the judgment debtor bankrupt (for debts of at least $5000).
Although any extra legal costs will be added to the judgment debt, enforcing a judgment will cost you further time and money. Unfortunately, there are still no guarantees you will get paid. However, any judgment debt will be reflected on the debtor’s credit rating, which can impact their ability to borrow money and, in turn, affect any business they operate.
Key Takeaways
Unpaid debts can have a significant impact on small to medium-sized businesses. However, there are steps you can take to maximise the chances of individual debtors paying up and also avoid the time and cost of issuing legal proceedings. It is important to be commercially realistic at every step. This allows you to weigh the risks of court proceedings against the benefits of a final settlement, even if that means receiving a slightly lower amount than the total debt owed.
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Frequently Asked Questions
Yes, a demand letter is usually required. It informs the debtor of the outstanding amount and provides them with an opportunity to settle the debt before further action is taken.
If the debtor refuses to pay, you can consider mediation, initiating debt recovery proceedings in a court or tribunal to obtain a debt recovery order, or engaging a debt collection agency.
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