Pursuing debt through the court system

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One of the main reasons everyday people find themselves involved in the Court system is in relation to debt recovery.

For the purposes of this explanation we have assumed that the debt is able to be recovered through the mainstream Court system, being the Local Court, the District Court, or the Supreme Court of NSW.

Certain types of debt require action in other jurisdictions – for example, debts under $20,000 which are prosecuted in the Small Claims Division of the Local Court.

There are also other types of money claims that are not technically debt claims that are prosecuted in the NSW Civil & Administrative Tribunal.

Let’s say someone owes you money for goods you provided to them that they have not paid you for.

Your first step should always be informal debt collection. The best starting point is an email or letter attaching an invoice or other evidence of the money you say you are owed, calling for payment by a particular time and indicating to the debtor that if payment is not made you will consider commencing formal legal proceedings to recover the debt.

If you receive no response or receive an unfavourable response you should consider asking a lawyer to prepare a letter of demand for you.

Sometimes when a debtor receives a letter from a lawyer, they will take the matter more seriously.

You can also consider approaching a debt collection company to collect the debt for you. A debt collection company will carry out a similar role to a lawyer but they are usually not legally qualified and if you decide to escalate the matter to formal legal proceedings you will need to see a lawyer anyway (or the debt collector might have a lawyer in house for this purpose).

Lawyers usually charge an hourly rate where debt collection companies often charge fixed fees or a percentage of the debt they are collecting, if they are successful.

Assuming you have tried to collect the debt yourself and have a lawyer send a letter of demand that has been ignored or not complied with your next step is to commence formal legal proceedings.

This is usually done by filing a document called a Statement of Claim which sets out the parties to the dispute, the circumstances that you rely on to say the debt is due and payable by the defendant and the amount of money that is being claimed.

For the purposes of this article, we have assumed that the debtor is an unwilling participant who is refusing to engage in the collection process.

Once your Statement of Claim is filed the defendant will have 28 days to file a defence.

Once the 28-day period has expired, if no defence has been filed you can make an application to the Court for what is known as “default judgment”.

Default judgment occurs when the defendant has refused to participate in the litigation so the Court makes Orders in your favour essentially formally declaring that you have succeeded in your case. This means the debt now becomes a “judgment debt” and can be formally enforced.
Enforcement can be a little bit tricky.

Depending on the steps you wish to take next, for example an examination notice to see if the debtor has any assets or obtaining some form of writ, an application ought to be made to either the NSW Civil & Administrative Tribunal or the Court in which you commenced your proceedings.

If you wish to proceed to having the debtor declared bankrupt, or if they are having the company wound up, you need to make a formal application to the Federal Court.

If a company is wound up or a person is declared bankrupt by the Court by virtue of your judgment debt there will then be appointed an independent third party (usually referred to as a trustee or liquidator) who will take control of the debtor’s assets, liquidate them, and if there is sufficient funds following the liquidation of the debtor’s assets, pay you in accordance with the judgment.

There are lots of important things to consider.

The major one is knowing the profile of the debtor. Is it likely that they have any assets?

Certain types of people are “judgment proof”. For example, a Court will not make an Order requiring that a debt be deducted from welfare payments. So, if the person you are seeking to recover from is receiving a Centrelink benefit, you should consider whether it is worth putting your time and resources towards formally recovering a debt that may not be enforceable against them.

The same can be said for any other person or entity who has no assets. While this will usually not be an impediment to you obtaining your judgment, you cannot get blood out of a stone and if the debtor has no assets and there is nothing to liquidate once you send them bankrupt or have them wound up, then it may have been a pointless exercise.

Daniel McKinnon

Since graduating with two degrees in Law and Commerce from the University of Wollongong, Daniel’s spent over ten years solving a wide range of legal problems for the people of Western Sydney.

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