Defining Debt | What is Debt and What To Do About It?
Chances are you already have a basic understanding of what debt is. However, the notion of debt can be more complex when you actually find yourself in a situation where you owe money to someone or someone owes money to you.
It’s important to be clear on what constitutes a legitimate debt, your rights as a debtor if being pursued, or alternatively your rights as a creditor if pursuing an outstanding debt.
Here are 10 key considerations for understanding and approaching debt to ensure you make an informed decision on what to do next.
1. What is Debt?
Debt defined simply is owed by a debtor (purchaser) to a creditor (supplier) for services rendered or products provided. These transactions can occur between businesses, individuals or institutions such as the government. The definition of debt becomes slightly more complicated when trying to determine what constitutes a legitimate debt that can be collected upon versus what is not a legitimate debt.
General business good practice is to document all correspondence in writing, whether before, during or after the transaction. By ensuring there is a procedure to document all correspondence, there will be a lower likelihood of confusion and there will be a paper trail of evidence that you can use to support your claim should a dispute ever arise over a transaction.
For a debt to be considered legitimate, the transaction needs to be underpinned by an agreement between both sides that stipulates the amount to be paid, clearly defines the services to be rendered (or product provided) and a time frame for delivery of that service or product, as well as for payment. Often this takes the form of a written contract or correspondence between two parties, as well as an invoice. Hence the importance of keeping clear written records.
When there’s a clear agreement in place, services have been rendered or product delivered, and money has not been paid within the specified timeframe according to the agreement, then it’s likely that the debt can be considered legitimate to be escalated.
Provided your services/product agreements and payment terms are well documented it’s usually clear that a debt exists. The more evidence available to support the terms of an agreement between parties, the more likely the debt will be seen as legitimate and hence be enforced by the law and able to be collected upon.
As stated by the ACCC, a debt should only be pursued if there are reasonable grounds to believe that a person is liable for that debt.
Summary Of Best Practices
Some basic documentation procedures can go a long way to help keep track of agreements and minimise any disputes over outstanding debts.
- Emails – Keep all emails and ideally seek confirmation to proceed with your services over email to ensure a basic written record exists between parties.
- Contracts for services – always provide a clear description and itemised breakdown of services rendered in the form of a contract, proposal or scope of works. Usually this takes the form of a signed document.
- Invoice – always provide invoices with clearly labeled items, business name, ABN and address.
2. What Are The Most Common Reasons For Debt?
For one reason or another money can’t always be paid on-time and hence it becomes a debt. The most common reasons a debt arises is usually due to:
- An inability to make payment. For example, a temporary cash flow issue or worse case a business which is going under.
- A dispute between parties over the nature, payment or delivery of goods and services, where the debtor refuses to pay until the dispute is reconciled.
- A breakdown of communications, where the situation deteriorates and reaches a stand still.
Debts are perfectly normal when they are manageable, timely and exist within agreed terms. However, debts become troublesome when they deteriorate, become drawn out, relationships breakdown or the other party simply refuses to pay. This becomes an increasingly difficult situation to navigate, both emotionally and professionally.
Before proceeding with debt collection, it’s important to understand what category the debt falls into. For example, if it’s a long term client that usually pays on time, then likely this is a manageable debt. However, if the client is unresponsive and more than 30 days late on the agreed payment period, then this starts to become risky and may become an unmanageable debt.
3. How To Approach Debt Collection?
Let’s face it debt isn’t a glamorous topic, it can be frightening and stressful for both debtors and creditors alike, with most of us not even knowing where to start or how to approach these difficult conversations with each other.
Having said that, it’s one of the most common disputes between businesses. Every business will face the issue of outstanding debts at some point in its life cycle. The method how you approach these situations usually determines the chances of collecting the debt.
Since you are dealing with other businesses, customers and people, there is no guarantee that they will pay. By putting in place proven strategies that approach the situation in a firm, professional and calm manner, you can maximise your chances of recovering any debts that arise.
4. What is The Law Around Debt Collection In Australia?
There are different laws for debt collection in each state of Australia. Most states require debt collectors to register, hold a licence and adhere to a code of best practices.
Generally speaking, during the collection of debt, a debt collector must not use physical force including coercion. They must not harass or hassle to an unreasonable extent. Nor mislead, deceive or take unfair advantage (source:: ACCC).
Federal and state level legislation is designed to ensure the fair and equitable treatment of both debtors and creditors, with institutions such as ASIC and the ACCC being clear on what is sound practice and what is not. For example see below:
Australian Consumer Law 2011
Privacy Act 1988
Competition and Consumer Act 2010
National Credit Code
National Consumer Credit Protection Act 2009
Australian Securities and Investments Commission Act 2001
Learn more at the ACCC.
5. What Is A Debt Collector?
A debt collector is a person or business who is actively pursuing a debt. Usually a debt collector falls into three categories.
- A creditor who is collecting a debt that is directly owed to them.
- An assignee where a creditor has been assigned the debt or purchased the rights to be owed that debt by the original creditor.
- A third party person or business acting on behalf of the creditor, such as a debt collection agency.
6. How to Reasonably Contact Someone Who Owes A Debt?
As stated by the ACCC there a number of reasonable purposes for contacting a debtor in regards to collecting a debt. It’s important that you are aware of these, that you maintain contact within the bounds of the law, especially if you are collecting your own debts.
Generally speaking, the main reasons include: give information about the debtor’s account, making a demand for payment, arrangement for repayment, put a settlement proposal or alternative payment arrangement to the debtor or to ask why an agreed repayment plan was not met.
7. What Are The Maximum Number Of Contacts?
The way in which you approach the collection of debt is also very important. For example a maximum of 3 phone calls or letters per week, with up to 10 per month, during the hours of 7:30am – 9:00pm on weekdays and weekends, but not on national public holidays. Finally, they must not make face-to-face contact more often than once a fortnight. Learn more at the ACCC here.
8. Principles For Fairness in Debt Collection
The ACCC lays out what debt collectors are and are not able to do in the way they conduct themselves collecting debts. It’s important that debtors are treated with equity, fairness and respect during the collection process and all best practices are adhered to.
9. How Long Can You Be Chased For A Debt In Australia?
The standard period for the amount of time a creditor can pursue a debt falls within a limitation period – usually 6 years, although sometimes more depending on the nature of the debt. This means a creditor must take legal action in a court of law to recover the debt within the standard limitation period.
10. Can Debt Collectors Take You To court?
Generally speaking yes, debt collectors can take you to court on behalf of the creditor. Having said that, there is a legal process to adhere to before any court action takes place. They need to show that they have tried to collect the debt using fair and sound practices laid out by ASIC and the ACC. Further, they need to have well documented debts and take action within the standard limitation period.
Whether you’re a debtor that owes money or a creditor that is owed money, debt collection doesn’t have to be difficult. Both parties are entitled to fair, reasonable and equitable treatment in resolving any disputes and finding a solution.
If you find yourself in the situation of debt, it’s important to know your rights and approach the situation in a professional manner. Usually it makes sense to contact a professional debt collection agency, a lawyer, the ACCC or ASIC to ensure you’re making the right decisions.
At Ezi Debt Collection we believe in recovering debts the easy way. We’ve created a streamlined, automated and personable approach that helps meet the needs of both debtors and creditors alike.
Get in touch with us today to see how we can help you recover your debts the easy way.