If an individual owes a debt to you and defaults in repayment of the debt then there are a number of steps you may be able to take to recover the debt.
See our article entitled “Letter of Demand, Negotiations and ADR – Recover a Debt Without Going to Court”, which sets out the steps to be taken in order to recover a debt from an individual or a company without going to court.
This article deals with taking legal proceedings against an individual to recover a debt, which may be necessary if earlier steps to recover a debt are unsuccessful.
1. Legal Proceedings to Recover a Debt
Seek legal advice and commence legal proceedings against the borrower.
Legal proceedings must be commenced before the limitation period expires (which for most contract related debts is a period of 6 years from the borrower’s default).
Legal proceedings must be carefully considered as there is a risk that if legal proceedings are unsuccessful then the court may award costs against the lender in favour of the borrower, which may be an additional cost borne by the lender in addition to the unpaid debt.
The type of legal proceedings available to a lender (and therefore how expensive they will be to run) depends on the nature of the debt and amount of the debt. For example, in NSW legal proceedings may be commenced in the Local Court (there are a number of different divisions), District Court or Supreme Court depending on the amount of the debt.
The basic steps in legal proceedings are as follows:
- the lender, being the party commencing legal proceedings, files in court and serves on the borrower (and any other party) a statement of claim, which sets out the lender’s claim;
- the borrower files and serves a defence, which sets out whether the borrower admits or denies the lender’s claim;
- if the borrower also has a claim against the lender then in addition to filing a defence the borrower should file a cross-claim against the lender (which can then file a defence to the cross-claim);
- discovery and subpoenas, whereby the parties make available to each other documents relevant to legal proceedings;
- the parties file their evidence, which is generally in the form of affidavits prepared by witnesses (for example, a representative of the lender who can give information about the debt);
- hearing before the court.
At the end of the hearing, the judge or magistrate presiding over legal proceedings delivers a judgment setting out their decision and the reasons for the decision.
2. Enforce the Judgment
Assuming neither party appeals the decision, the lender must seek to enforce the judgment and have the borrower repay the amount awarded by the court. This can be done in a number of ways:
- seek voluntary repayment
- seizing assets or property
- garnishee order
3. Seek Voluntary Repayment
If a judgment is made against an individual then they are more likely to voluntarily repay the debt than they would have been prior to the judgment in order to avoid the lender taking any other action to enforce the debt, which may have undesirable further consequences for the borrower.
4. Seizing Assets or Property
If a lender has obtained a judgment against a borrower and the lender wishes to use the proceeds of sale of the borrower’s property to repay a debt then the lender must apply to the court for a writ of execution, which authorises the sheriff (not the lender) to seize property and sell it at public auction. If a writ of execution is obtained the lender has a legal right to have the borrower’s property sold and for the debt to be repaid out of the proceeds of sale, after payment of the sheriff’s costs and the auction costs.
5. Garnishee Order
A garnishee order is an order issued by a court to a third party requiring the third party to pay money that it would ordinarily pay to the borrower to the lender or court. It operates from the date of the order until the debt payable to the lender is repaid in full.
For example, in respect of debts owed by individuals garnishee orders are frequently issued to employers so that funds are withheld from the employee’s wages to repay the lender.
If an individual owes at least $5,000 and commits an act of bankruptcy then the individual or any lender to the individual may approach the court to seek a sequestration order declaring the individual bankrupt.
An individual who is made bankrupt will have a bankruptcy trustee appointed to manage their financial affairs, which includes selling the individual’s assets to repay their creditors. Any secured creditors are repaid first out of the proceeds of sale of any secured assets then any unsecured creditors are repaid out of what is left over from secured assets or from the proceeds of sale of any remaining assets. If there are insufficient funds to repay all creditors in full then an individual will remain bankrupt for a period of 3 years or until a court otherwise orders, at which time the bankruptcy will be discharged.
While an individual is bankrupt there are limitations on how much the individual can earn without repaying amounts to creditors, what assets the individual can own and purchases on credit.
7. Top Tip
It is critical that you keep a record in relation to any advance of money made giving rise to the debt, any repayments of the debt and attempted recovery of the debt. This is good practice, but may be necessary if recovery is required through the court.
If you’re owed a significant debt, you should speak with a lawyer straight away. Taking legal action to recover a debt is complex, so a good lawyer can guide you through the process.