This fact sheet is for information only. It is recommended that you get legal advice about your situation.
Peter received a letter from a debt collector stating that he owed $2500 to MAJOR BANK. When he first read the letter Peter had no idea what the letter was referring to. Then Peter remembered he had paid off a debt to MAJOR BANK around 5 years ago.
Peter immediately rang BIG DEBT COLLECTOR and told them he had paid it. The person he spoke to said “prove it, if you can’t prove it you owe it”. Peter has turned his house upside down searching for proof that he had repaid the debt with no success. The debt collector keeps ringing demanding the debt. Peter wonders what he can do.
If you have fallen behind in the payment of a debt chances are the creditor or a debt collector will contact you. This contact may be by phone or letter. A letter sent by a creditor or its debt collector will often threaten you with legal action unless the debt is paid.
WHAT SHOULD YOU DO IF A CREDITOR OR DEBT COLLECTOR DEMANDS PAYMENT OF A DEBT?
Before you pay the amount demanded by the creditor or debt collector you should:
- Think about whether you owe the money. Do you remember the debt? Check your records.
- If you remember the debt is the amount claimed about right?
- Has it been over 6 years since you made a repayment to the debt?
- Is the debt collector a member of the External Dispute Resolution Scheme (EDR)? See Fact Sheet: Dispute Resolution. Most debt collectors are now members of the EDR, which is administered by the Australian Financial Complaints Authority (AFCA).
Australian Financial Complaints Authority (AFCA)
Ph : 1800 931 678
5. If the debt was originally a telecommunications or energy and water debt, you need to lodge in the relevant EDR against the original company where you obtained the service.
Get legal advice if you don’t think it’s right
Energy & Water Ombudsman NSW (EWON)
Ph: 1800 246 545
Telecommunications Industry Ombudsman (TIO)
Ph: 1800 062 058
I THINK I OWE THE DEBT AND THE AMOUNT CLAIMED IS RIGHT, WHAT DO I DO NOW?
You need to consider how to respond to the creditors or debt collectors’ demand for payment. Your options are:
- Repay the debt in full in one lump sum payment
- Negotiate with the debt collector/creditor for a repayment arrangement on the grounds of financial hardship
- Negotiate to settle the debt for a reduced lump sum
- Do nothing.
1. REPAY THE DEBT IN FULL
If you have sufficient money to repay the debt in full it is best to do so as this will ensure that the debt doesn’t increase any further with added interest and enforcement costs. Keep a receipt for the payment.
If you have other debts you will need to take into consideration the impact of a lump sum payment on your ability to repay those other debts.
2. NEGOTIATE A REPAYMENT ARRANGEMENT WITH THE DEBT COLLECTOR/CREDITOR
If you are unable to repay the debt in full you may wish to negotiate to make a repayment arrangement. Make sure when offering repayment arrangements you:
- Can afford the repayment amount you are offering
- Tell the debt collector if you are in financial hardship
- Only offer to pay monthly. This means that you have a whole month to save the money required for the repayment
- If the creditor agrees, ask them to confirm the agreement in writing
- Confirm any verbal agreement by writing to the creditor yourself (make sure you keep a copy of this letter).
The process to make a repayment arrangement is:
- Start making repayments of an amount you can afford
- If you cannot afford to make any repayments or a repayment that will repay the debt in a reasonable time get advice.
- Ring the debt collector and ask for a repayment arrangement
- If the debt collector agrees to the proposed repayment arrangement confirm it in writing.
- If the debt collector won’t agree to a repayment arrangement:
- If the credit law applies (see Fact Sheet: Does the National Credit Law apply?) then you can apply for a variation of the contract on the grounds of financial hardship (see Fact Sheet: Financial Hardship) and AFCA can make a determination that a repayment arrangement should be granted.
- If there is a telecommunications debt, lodge in the TIO.
- If it is an energy/water debt, lodge in EWON.
IMPORTANT: If the debt collector is in AFCA then lodge a dispute if they don’t agree to the amount you are offering. This will stop all further action until the dispute is resolved. The dispute is that the debt collector will not grant a reasonable request for a repayment arrangement.
3. OFFER A REDUCED LUMP SUM TO FINALISE THE DEBT
Depending on the size of the debt, the age of the debt and the gap between your offer and the actual debt, the debt collector may accept a reduced lump sum settlement offer.
If you wish to make a reduced lump sum offer it should be on a “without prejudice” basis, which means you write “without prejudice” on the letter.
If the debt collector accepts your lump sum offer it is critical that you get their acceptance of your offer in writing. Any acceptance offer should state that the amount is in “full and final settlement of all monies owed”.
4. DO NOTHING
Your final option is to do nothing. If there is no way that you can afford to repay the debt and you have no property that could be sold to repay the debt, you may opt to do nothing. However, you need to keep in mind that the creditor/debt collector has six years to commence proceedings against you in relation to a debt in relation to a contract (12 years if the debt is based on a deed or a mortgage), and 12 years to enforce any court judgment obtained against you (in some circumstances even the 12 years to enforce judgement may be extended). You may have income or property at some time in this period. If this is the case, you will have to pay the debt PLUS interest, which after many years may be a large sum of money. See Fact Sheet: Debt Enforcement in the Local Court for more information.
WHAT IF THE DEBT COLLECTOR OR CREDITOR IS HARASSING YOU?
I DON’T THINK I OWE THE DEBT OR I ONLY OWE PART OF THE DEBT
There are many reasons why you may not be liable for all or part of a debt claimed. Examples include:
- You did not receive the goods or services for which payment is claimed
- The amount claimed has been calculated incorrectly
- You have already paid the debt
- You are not the debtor (a case of mistaken identity)
- The debt is statute barred – this is when the creditor has failed to bring an action to recover the debt within the time stipulated by law
- The circumstances surrounding the formation of the contract were unjust
- You were misled about what you were signing (or the goods or services you were paying for)
IF YOU BELIEVE THAT YOU HAVE A REASON WHY YOU SHOULD NOT HAVE TO PAY THE DEBT YOU SHOULD:
- Seek legal advice immediately
- Tell the debt collector why you believe you do not owe all or part of the debt. Tell the debt collector you have a dispute and you want it investigated.
- Request copies of all relevant loan documents.
- If you know you owe part of the debt start making repayments to reduce that amount but continue with a dispute on the rest of the debt. DO NOT make payments on a debt you believe may be statute barred – get advice first.
- If the debt collector threatens legal action, refuses to investigate the dispute or continues to insist you owe the whole debt you should:
- If the debt collector is in EDR lodge a dispute in EDR.
- If the debt collector is not in EDR get legal advice immediately as you may have to file a defence to court proceedings.
If you are stressed by constant contact by creditors, and have no long-term capacity to pay your debts, you may wish to consider bankruptcy. See Fact Sheet: Should I Consider Bankruptcy?
YOUR CREDIT REPORT
Often a debt collector will threaten to list a default on your credit report if you do not pay in accordance with a demand. This is a common tactic for encouraging payment. It is also legal so long as the debt is more than 60 days overdue. Unfortunately, you may be listed even if you dispute the debt. As you will not usually be notified that a default listing has occurred, you should check your credit report. For more information on checking you credit report and disputing errors on your credit report, see Fact Sheet: Your Credit Report.
NEED SOME MORE HELP?
See Fact sheet: Getting help for a list of additional resources.
Last updated: September 2019