Debt Recovery

Debt recovery matters arise when one person, business or organisation says that another party owes money and has failed to pay it. The debt may relate to unpaid invoices, goods or services, loans, rent, damage to property or another commercial transaction.

A creditor is the party claiming that money is owed. A debtor is the party said to owe the money. In some cases, the debt is admitted but the debtor cannot pay immediately. In other cases, the debtor disputes the amount claimed or denies that anything is owed at all.

Debt recovery should be approached carefully. A creditor may have a strong claim but still need to prove it with documents and evidence. A debtor may have a valid defence but still need to respond within strict time limits. Ignoring correspondence or court documents can lead to default judgment, enforcement action and additional costs.

We act for both creditors and debtors in debt recovery matters. We assist with letters of demand, responses to claims, negotiation, settlement, court proceedings and enforcement.

Letters of demand

A letter of demand is usually the first formal step in recovering a debt. It is sent by the creditor or the creditor’s lawyer. It identifies the debt, explains why payment is required and gives the debtor a deadline to respond.

A letter of demand should be clear and accurate. It should identify the parties, the amount claimed and the basis for the claim. It should also attach or refer to any important documents. These may include invoices, contracts, purchase orders, loan agreements, emails, account statements or earlier correspondence.

The letter will usually request payment within a set period. It may also state that legal action may be taken if payment is not made. A letter of demand is a notice asking a person to pay a debt and warning that court proceedings may follow if payment is not made.

A debtor should not ignore a letter of demand. If the debt is admitted, it may be possible to negotiate payment terms. If the amount is disputed, the debtor should respond in writing and explain the reason. If only part of the debt is disputed, that should also be made clear.

A creditor should also think carefully before starting proceedings. Court action can involve filing fees, legal costs, delay and enforcement risk. There may be little point obtaining judgment against a debtor who has no realistic capacity to pay. In other cases, court action may be necessary to protect the creditor’s position.

Evidence in debt recovery claims

A debt recovery claim is usually decided by evidence. It is not enough to say that money is owed. The creditor must prove the debt on the balance of probabilities. That means the court must be satisfied that it is more likely than not that the debt is owed.

Useful evidence may include a written contract, invoices, receipts, bank records, text messages, emails and account statements. If goods or services were supplied, the creditor should keep records showing what was provided and when payment became due.

A debtor may also need evidence. This may include proof of payment, evidence that the goods or services were defective, correspondence disputing the invoice or documents showing that the wrong person has been sued.

Many debt disputes can be resolved once the documents are properly reviewed. Sometimes the dispute is really about timing. Sometimes it is about whether the work was completed. Sometimes it is about whether the amount claimed includes interest, fees or charges that were never agreed.

VCAT debt recovery matters

Some debt recovery matters may be brought in the Victorian Civil and Administrative Tribunal. VCAT may be suitable where the dispute is a consumer and trader dispute or a goods and services dispute. VCAT deals with some civil claims of this kind, although it does not hear every type of debt dispute.

VCAT can be useful in the right case. It is often less formal than court. It may also be more suitable for disputes about goods, services, defective work or consumer transactions.

Legal representation at VCAT is not always automatic. In goods and services cases under $15,000, VCAT says parties generally cannot have a lawyer or other professional representative speak for them. A party may still obtain legal advice, but permission is usually needed for a lawyer to appear unless an automatic right to representation applies.

Costs are also different at VCAT. Each party usually pays their own legal costs unless VCAT makes another order. This can affect whether VCAT is the most practical forum for a dispute.

Before filing in VCAT, it is important to check whether the claim falls within VCAT’s jurisdiction. Filing in the wrong place can cause delay and wasted costs.

Magistrates’ Court debt recovery proceedings

Many debt recovery claims in Victoria are brought in the Magistrates’ Court. The Magistrates’ Court can hear civil disputes up to $100,000. These disputes include debts, claims for damages and other monetary disputes.

A debt recovery proceeding in the Magistrates’ Court is usually commenced by filing a Complaint. The Magistrates’ Court identifies Form 5A as the Complaint form used to commence legal action in its civil jurisdiction.

The Complaint should be supported by a Statement of Claim. This document explains the facts relied on by the creditor. It should set out how the debt arose, what amount is claimed and why the debtor is liable.

The court documents must then be served on the debtor. Proper service is important. A creditor cannot usually obtain judgment unless the debtor has been served in accordance with the rules.

Once served, the debtor must act quickly. A debtor who receives a Complaint Form 5A must lodge a defence within 21 days, even if they wish to negotiate or claim hardship.

A defence is filed using Notice of Defence Form 8A. The debtor may deny the whole claim, admit part of it or raise a legal defence. Possible defences include that the debt is not owed, the amount is wrong, the wrong person has been sued, the contract was unfair or the claim has been brought outside the time limit. There are several possible defences to creditor claims, including claims brought outside the creditor’s time limit.

If no defence is filed within time, the creditor may apply for default judgment. If a debtor does not file a defence within 21 days of being served, the creditor can apply for an order to be made against them.

Default judgment can have serious consequences. It may allow the creditor to take enforcement action without a contested hearing. A debtor may later seek to have judgment set aside, but that can be difficult and costly.

What happens after a defence is filed?

If a defence is filed, the matter becomes contested. The court will usually take steps to manage the dispute. This may include a pre-hearing conference, mediation, arbitration or directions hearing.

The purpose of these steps is to narrow the issues and see whether the matter can resolve without a final hearing. Many debt recovery matters settle before hearing. Settlement may involve payment of a reduced amount, instalments, withdrawal of part of the claim or agreement about costs.

If the matter does not resolve, it will proceed to a hearing. At the hearing, the creditor must prove the debt on the balance of probabilities. The debtor may challenge the evidence, rely on a defence or dispute the amount claimed.

The magistrate may make an order for the full amount. The magistrate may order payment of part of the amount. The claim may also be dismissed. The result will depend on the evidence and the applicable law.

Higher value debt claims

If the amount claimed is more than $100,000, the matter will usually need to be brought in a higher court. The Magistrates’ Court states that disputes over $100,000 are heard in a higher court.

The County Court or Supreme Court may be appropriate depending on the amount, complexity and nature of the claim. Higher court proceedings can involve greater cost and risk. Legal advice should be obtained before commencing a higher value claim.

Time limits

Time limits are important in debt recovery matters. Many ordinary debt claims in Victoria must be commenced within six years. The relevant time may run from when the debt became due, when payment was last made or when the debt was last acknowledged in writing.

A debt that is too old may be statute barred. That means the creditor may no longer be able to sue to recover it. A debtor who receives a claim for an old debt should get advice before making any payment or written admission.

If judgment is obtained, a different time period applies to enforcement. A creditor generally has 15 years to take action to enforce a judgment debt.

Enforcement

Obtaining judgment does not always mean immediate payment. If the debtor does not pay voluntarily, the creditor may need to take enforcement action.

Enforcement options can include an instalment order, summons for oral examination, attachment of earnings, attachment of debt or warrant to seize property. These are common options available after judgment.

The best enforcement option depends on the debtor’s circumstances. A debtor with employment may be treated differently from a company with assets. A debtor with no income or property may be difficult to recover from, even after judgment.

Debt recovery is not just about whether money is owed. It is also about proof, procedure, timing and practical recovery.

This page provides general information only. It is not legal advice. Anyone involved in a debt recovery dispute should obtain advice about their own circumstances.