Debt Collection Methods

Debt Collection Methods

Debt Collection Methods

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As part of the Federal Government’s response to the pandemic, the threshold for issuing statutory demands and bankruptcy notices to debtors temporarily increased to $20,000. The timeframe for responding to such demands and notices was also temporarily extended from 21 days to 6 months.

Those protections expired at the end of December 2020 and creditors can now:

    • issue statutory demands to companies for amounts of not less than $2,000. The Federal Government is increasing this threshold to $4000 as from 1 July 2021.
    • issue bankruptcy notices to individuals for amounts of not less than $10,000. This has increased from the $5,000 threshold which existed prior to the introduction of the temporary relief measures.

More information concerning these temporary measures can be found here.

Debt Collection Methods

As has been reported widely in the media, the temporary measures appear to have resulted in significant unpaid debt in the economy. At some stage, creditors are likely to look to recover their debts and may choose to implement any of the following debt collection methods:

IndividualCompany
DemandDemand
Legal proceedingsLegal proceedings
Warrant of saleCalling up personal guarantees
Charging order against propertyStatutory demand
Investigation summons
Bankruptcy notice

In addition to the above collection methods, the Australian Taxation Office (ATO) also has additional powers including:

    • issuing garnishee notices to a debtor’s customers and/or bankers. These notices require the recipient to remit funds directly to the ATO; and
    • issuing Director Penalty Notices to company directors in respect of a company’s unpaid superannuation, PAYG withholding and GST. There are two types of notices:
      • If the returns were lodged within 3 months of the due date, or the SGC obligation is reported by the due date, a director in receipt of a notice may avoid personal liability by making payment of the debt, placing the company into administration or liquidation or the company entering into and maintaining a repayment arrangement for the entire outstanding debt;
      • If the returns were lodged in excess of 3 months of the due date, or the SGC obligation is reported after the due date, the only ways a director may avoid personal liability is to cause the company to pay the debt or enter into and maintain a repayment arrangement for the entire outstanding debt.

In our experience, including prior to the pandemic, many individuals and companies chose to pay other creditors prior to making payment of their taxation and other statutory liabilities effectively treating the ATO and certain other statutory creditors as lenders of last resort. Accordingly, the ATO continues to be one of the larger creditors in any external administration. With the additional pressures applied by the pandemic, the debts faced by these entities are likely to be larger than during what we consider as normal business conditions.

We anticipate that the ATO will at some time in the near future, recommence its debt recovery strategy, especially from those debtors that are not engaging in relation to their debts.

In circumstances where clients are unable to pay a debt, they may seek to resolve the matter themselves or may seek advice. Accountants and advisors should consider:

    • in the case of a business, reviewing the operations to determine whether the circumstances that gave rise to the unpaid debt have been addressed. An unviable business is almost always not worth saving.
    • contacting the creditor to negotiate payment terms.
    • seeking advice from a solicitor or a properly qualified insolvency practitioner such as a member of ARITA. Early advice as to the options available to address the situation can assist in resolving a client’s concerns and map a way forward. Options may be informal (eg. negotiated settlements) or formal (eg. voluntary administration, personal insolvency agreements). More information on these options can be found here.

Contact SV Partners for specialist advice on the options available to deal with unmanageable debt.

 

Article written by Alan Scott, Director – SV Partners Adelaide

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