How can lawyers help recover debt?

How can lawyers help recover debt?

There inevitably comes a time in every business where a client or customer owes money and is not responding to the invoices provided. How you proceed with recovering this debt may impact your ability to be paid the money and maintain the client if that is your aim. 

This article outlines the debt recovery options in NSW which are substantially similar to other Australian states and territories. The steps are generally in order, however, certain debt recoveries may require a different timeline or it may be appropriate to skip some steps. A lawyer can advise you throughout the entire debt recovery process.

When a person or company is owed money, they are referred to as a creditor. When a person or company owes money, they are referred to as a debtor. 

Direct Communication

In most circumstances, the best first option to take is to communicate directly with the debtor. This communication would likely involve a reminder to them about the debt, a request for payment, the development of a flexible repayment option and an explanation of the consequences of non-payment (such as next steps, legal proceedings). It is important to remain encouraging and polite in these talks. Creditors should not harass or coerce debtors and doing so can lead to harassment claims. 

Letter of Demand

A letter of demand may be sent to the debtor containing a formal request to repay the debt by a certain date. The letter states that legal action will be pursued in the event of non-payment. Clear records should be kept of the letter, and when and how it was delivered. This formal request may prompt repayment, commence negotiations or in the least, evidence your request for repayment.

Alternative Dispute Resolution

Alternative dispute resolution can take many forms. In debt collection, mediation and adjudication are most common.

Mediation is an informal process where a third-party helps the creditor and debtor reach an agreement. The outcome of a mediation is not binding. However, it can be a time and cost-efficient option which allows for a continued business relationship. In NSW, Community Justice Centres offer free mediation services.  

Adjudication is a dispute resolution process provided for in a contract or statute which is often used in the construction industry. It involves an independent adjudicator (decision-maker) assessing the claim and making a determination. If the debtor fails to pay, this determination is enforceable by the courts and registered as a judgement debt. This is a fast resolution process with strict deadlines culminating with a determination within 10 days of the adjudicator receiving the Adjudication Application and Adjudication Response. 

Legal Proceedings

Legal proceedings are commenced by filing a Statement of Claim with the appropriate court. The court will depend on the size of the debt. The cost and speed of legal proceedings are less certain and depends on whether the debtor defends the claim. A default judgement in favour of the creditor is given if the debtor does not file a defence.  Successful legal proceedings mean a creditor is granted a judgement debt. 

Enforcement of a Judgement Debt

If a judgement debt is violated, there are a few enforcement options which must be taken up by the creditor within 12 years of the judgement date. 

Investigating the best enforcement option

Before deciding on an enforcement option, there are ways to investigate the debtor’s financial circumstances to decide how to proceed. 

  • Examination notice: An examination notice requests the debtor to provide details of their income, assets and liabilities to assist the creditor in deciding how to enforce the judgement. For example, the notice may inform the creditor of the debtor’s bank over which they can then seek a garnishee order.
  • Examination order: After the period given on the examination notice (at least 28 days) or a failure to comply with the notice, the creditor may apply for an examination order requiring the debtor to go to court and explain their financial position.

Enforcement options

  • Garnishee order: A garnishee order enables the creditor to recover the debt from a third party, such as the debtor’s bank, their employer (debt taken from debtor’s wages/salary) and people who owe the debtor money.
  • Writ of execution (writ for the levy of property): A writ for the levy of property may be made against the debtor’s property. This writ allows the Sheriff Office to seize and auction the debtor’s property to recover the judgement debt. 
  • Writ for possession of property: A writ for possession of property may be issued allowing the debtor’s real property (house and land) to be sold by the Sheriff to repay the debt. This writ will only be issued in circumstances where the debt cannot be recovered by alternative means (payments by instalment, writ of execution). 
  • Bankruptcy proceedings: Generally as a last resort, creditors can apply for a bankruptcy notice if the debtor owes you more than $5,000. The debtor then has 21 days  to respond to the notice before the creditor can bring proceedings. Following proceedings, a sequestration order may be granted by the Court declaring the debtor bankrupt and giving control of the debtor’s property to a trustee. The trustee then distributes the assets to creditors in order of priority. This means the judgement creditor may not recover the debt if other creditors have priority. Due to Covid-19, bankruptcy notices served on or after 25 March 2020 require a debt of $20,000 and a 6-month period for the debtor to respond before bankrupty proceedings can be commenced. 

Alternative debt collection where the debtor is a company

Creditor’s statutory demand:  This letter of demand issued under section 459E of the Corporations Act 2001 (Cth) can be supported by the judgement debt or an affidavit. It is available where the debt is greater than $2,000 and the debtor is a company. It gives the debtor company 21 days to act until the debtor company is presumed insolvent . Consequently, the creditor can apply for the winding up of the company and the liquidator distributes the company’s assets to creditors in order of priority. 

Due to Covid-19, statutory demands served on or after 25 March 2020 require a debt of $20,000 and a 6-month period of compliance before the debtor company is presumed insolvent. 

Temporary debt protection extensions due to Covid-19

In addition to the changes to debt amounts and response periods for statutory demands and bankruptcy notices, as of 25 March 2020, debtors can receive temporary debt protection (TDP) for 6 months, rather than 21 days. TDP prevents the enforcement of unsecured debts, including through a garnishee order or writ of execution. At the time of writing, these Covid-19 measures have effect until 31 December 2020. 

Key Takeaway

Most businesses will need to collect debt at some stage and in most cases, the early steps will prompt repayment without leading to court proceedings. Direct communication and mediation are particularly good options, not only for being low cost and time-efficient, but also as they are more likely to keep the business relationship intact. 

However, where necessary, a lawyer can assist with instituting court proceedings and enforcing a judgement debt. It is worth noting that due to Covid-19, recovering debt through Statutory Demands and court orders may take at least 6 months.

We work with many startups, small businesses and enterprise clients on recovering debts. Contact us if you need assistance on a debt recovery matter.

About Brigid Nelmes

Brigid NelmesBrigid is a legal intern at OpenLegal, working with our legal content team. She is currently completing her Bachelor of Laws and Bachelor of Arts (International Studies) at the University of Technology Sydney. Her interests are in digital/privacy and startup law.