Demands for payment

Contributed by Elizabeth Samra of Consumer Law Centre of the ACT and Liisa Wallace of Care Financial Counselling, and current to March 2022. "Letters of Demand" was contributed by Mary Hawkins, DCLS, for the NT Law Handbook.

A debtor who is in arrears on payments (meaning, someone who has overdue payments) generally receives a letter from the creditor demanding payment. Often creditors hire debt collection agencies to do this work.

Regulated credit and notices of default

If the debt is a credit contract, mortgage, guarantee or consumer lease, then it will likely be regulated by the National Consumer Credit Protection Act 2009 (Cth) (“NCCP Act”) and the National Credit Code (“NCC”). This legislation regulates consumer lending and offers consumers important rights and protections, particularly in relation to unsuitable and unjust contracts, financial hardship and debt enforcement processes. For example, if the debt arises from a credit contract regulated by the NCC, a credit provider cannot commence legal proceedings or take any other enforcement action unless:

• the debtor is in default under the contract (usually behind in payments);
• the credit provider has given to the debtor, and any guarantor, a default notice allowing the debtor a period of at least 30 days from the date of the notice to remedy the default; and
• the default has not been remedied in that time.

For more information on the credit law, see National Credit Laws.

Letters of demand

For debts not governed by statutory procedural requirements, collection action typically commences by way of a “letter of demand”.

A letter of demand usually warns a debtor that court proceedings will be taken if the debtor does not pay the debt within a specified period. A letter of demand is not a court document.

A debt collection agency may add to the alleged debt a fee often referred to as its “costs”, but whether such costs are recoverable from the debtor is questionable. Unless there is evidence that the debtor agreed to these costs (by way of contract, for example), then generally this fee does not require payment. A debtor who has paid debt collection costs may seek a refund or deduction from the total amount owed.

Responding to a letter of demand

Many people assume liability for a debt in circumstances where the debt could be disputed. For this reason, it is prudent to consult a lawyer or financial counsellor if in doubt.

A person who receives a letter of demand should:

• Check the basis of the claim;
• If a contract exists, check the name or names on it to ensure they are responsible for the debt;
• Check the amount the creditor is claiming - the calculation of the total amount owed can be complicated and mistakes can be made;
• Where appropriate, write to the creditor asking for a detailed statement of individual items, interest, terms, charges and any other relevant information. Request that no further action be taken until this information is provided. Make sure no acknowledgement of the debt is made;
• If the letter has come from a debt collection agency, write to them advising that a letter has been written to the creditor asking for a detailed statement;
• When a statement is received, check it carefully or have it checked by a professional body;
• If there appears to be errors or areas of doubt, write to the creditor requesting they clarify or correct the statement;
• If a satisfactory response is not forthcoming, seek advice from a lawyer or financial counsellor about how to proceed;
• Check that the creditor has not run out of time to commence recovery action in court (see Statute barred debts).
• Consider payment options (see Ways to Deal with Debt).

All letters to creditors and debt collection agencies should be dated and photocopied. Copies should be kept for future reference.

Ways to deal with debt

It is recommended a debtor obtain a copy of their credit report to have a clear picture of what is owed to all creditors before beginning to work out how to deal with the situation. A person is entitled to a free copy of their credit report each year. Information should be sought about other debts not listed on the credit report (see Credit Reporting).

If a debtor does not dispute the debt, payment in full is one option. If the debtor cannot afford to pay, some options are detailed below.

Extension of time to pay

The debtor can ask to extend deadlines for individual payments, or the total time period for all payments.

Pay by instalments

The debtor can write a letter to the creditor offering an affordable repayment arrangement. The letter should include a brief overview of the debtor’s income and expenses, showing how much the debtor can afford each pay period. It is also sometimes useful to include a short summary of the debtor’s circumstances and why a payment by instalment arrangement is required. The debtor should also start making payments.

Reduced payments

If it is hard to meet the current payments, the debtor can work out what is affordable. It is better to offer a small amount and pay regularly than to pay different amounts haphazardly. It is important to ensure that interest charges on the debt are covered or that a request that the interest be frozen is made. Any reduction in payment amounts will mean the debtor will be paying over a longer period. It may also mean that there are fees or charges incurred. A request to the creditor to give up the right to collect any fees or charges can be made.

Moratorium

The debtor can ask for a period (usually 1 to 3 months) of not making any payments on the loan. This might enable the debtor to make payments on essential things like rent, mortgage, electricity or medical bills. The debtor can also ask that no interest be added to the loan during this moratorium. A moratorium is generally only a short-term solution. This type of arrangement is most likely to get agreement from a creditor when the debtor is experiencing temporary financial hardship, and where there is a likelihood that the debtor’s circumstances will improve after the moratorium period.

Offer a lump sum

If the debtor has access to a lump sum of money (eg through a compensation payment, inheritance or asset sale), even if it is less than the full amount, the creditor may accept this in lieu of the full amount. The debtor will need to be sure the creditor is agreeing to accept the amount in ‘full and final settlement’ of the debt. It must be clear the creditor gives up the right to collect the remaining amount. This arrangement is best made in writing. If the debtor is considering offering a lump sum, it is best to seek assistance from a specialist worker, such as a financial counsellor.

Request a write-off or waiver of the debt

When the debtor cannot make any payments, and has few or no assets and their circumstances are unlikely to change in the foreseeable future, a request for a waiver of the debt is an option. Creditors may agree, if it will cost them more than it is worth to pursue the debt, and there is very little likelihood that the debt will be paid. Any agreement of this type should be confirmed in writing. Sometimes a debtor may need to provide supporting documentation such as a letter from a health professional or welfare worker.

Hardship

If the credit contract is regulated by the NCC and the debtor is experiencing financial hardship and can’t meet loan repayments, the debtor has the right to apply for a hardship variation (see Financial Hardship). This type of situation arises most often when someone loses a job, becomes ill, or has a ‘reasonable cause’ for the hardship – provided that a debtor reasonably expects to be able to discharge the obligations under the contract if the terms of the contract are changed. If hardship is refused, the debtor can lodge a complaint with an approved external resolution scheme.

Pro-rata

A pro-rata payment scheme may be a way to deal with more than one debt. This is an informal arrangement and involves a debtor offering to repay all creditors proportional amounts in instalments over a given time.

Debt consolidation

Debt consolidation means that a debtor pays out existing debts by taking out a new loan. A debtor can only do this if he/she qualifies for a new loan.

Advantages of a consolidation are:

• May forestall legal action or repossession;
• Can give a debtor breathing space and a plan to get out of debt over time;
• May reduce payments initially though not necessarily in the long term;
• May be less stressful to deal with only one creditor rather than lots of smaller ones.

Disadvantages of a consolidation are:

• Once debts are consolidated repayments stay the same (as individual debts are repaid, payments will decrease and will incur interest with a consolidation loan);
• The debtor may not find it any easier to make regular repayments;
• Some original debts may have had no interest (eg debts to relatives);
• The new contract period may be longer and more interest paid over time;
• There may be loan establishment fees or other charges (and these can be significant);
• The creditor may secure previously unsecured debts (eg a mortgage over the home);
• A debtor may have less flexibility;
• A debtor may not be eligible for loan consolidation if already in debt.

BEWARE! There are lots of companies now that offer refinancing that is very expensive or even unfair! There are some online calculators that may help compare costs. Go to www.moneysmart.gov.au for more information.

Do nothing

Another option is to do nothing. If a debtor does not have assets or the income to pay the debt, this may not affect them. However, if judgment is entered in a court, it will be listed on a debtor’s credit report for five years and the creditor can take steps to enforce the judgment for 12 years following the order. Further, if the debtor acquires assets or receives income, they may be at risk of action by the creditor.

Bankruptcy or formal arrangements under the Bankruptcy Act 1966 (Cth)

Bankruptcy is a serious matter and should only ever be a last resort. Consider it very carefully and always seek advice.

Superannuation

In some situations, if a debtor has superannuation, it may be possible to access part or all of it. There are very specific guidelines that govern access to superannuation and it is best to seek assistance before applying to have superannuation released.

Negotiating with creditors

A debtor is best placed to be upfront with a creditor from the outset and to attempt to resolve a dispute by way of negotiation, if possible. Some considerations when approaching creditors include:

• The debtor should attempt to ascertain how much he/she can afford before approaching the creditor with a payment arrangement;
• The debtor can approach the creditor by phone, in writing or directly. It is best if the debtor explores options openly and lets the creditor know his/her intentions. Ask to be put through to the Hardship Team;
• When negotiating, don’t take ‘no’ as the only possible response. The debtor should demonstrate that they are flexible by offering workable solutions but not ever agree to pay more than they can afford;
• Ask the creditor to put any agreement in writing, if they do not do this, write to them confirming details of any arrangements made;
• Keep a record of all phone conversations, letters and discussions. This will make it easier for the debtor to show what was said or agreed to on a certain date;
• Keep creditors up to date. Communicate with them if an agreement can’t be adhered to and see what else may be done.

If a debtor is unable to reach an agreement with the creditor(s), then it may be helpful to have a financial counsellor to provide support, information or advocacy.