When is a debt written off in Australia?
Outstanding debts by clients or customers can be wiped clean leaving the business owner out of pocket and frustrated.
A debt is like most legal matters and is subjected to a states or territories statute of limitations, where by if a creditor has not been able to recover the debt within those states or territories timeline the debtor is not legally obliged to pay the debt.
With this in mind debt collection for any business should be a priority, failure to collect debts impacts cash flow and can cause financial troubles.
For the purpose of this article and keeping it general to Australia we will use a simple contract debt as the focus for this information.
In this article our debt collection professionals attempt to get you to understand some considerations for recovery timelines, statute of limitations for debts and what or how these may impact your business.
What is Australia’s statute of limitations for debts?
If you want to know when is a debt written off, in Australia the statute of limitation for debt varies by the type of debt and the jurisdiction of which the debt is held.
With the only exception being the Northern Territory where the statute of limitations is 3 years, all other states in Australia are subject to a 6-year statute of limitations rule for a simple contract debt.
Equally important to understanding your state or territory statute of limitations, is that it is not the deadline for recovering the debt, but the deadline for filing a relevant claim within the courts.
If you have received a judgement from the courts in your favour to recover the debt, this judgement may influence the statute of limitations through most of Australia to a 12 year statute of limitations.
What does a statute-barred debt mean?
A creditor has the right to sue a debtor for the recovery of the unpaid debt during the limitation period, however if the limitation period expires the debt, then becomes statute barred.
This would mean the creditor is no longer able to take legal action towards recovering the debt, and the debtor would have an absolute defence, therefore even if the creditor files a claim it would not be legally enforceable.
When is the start of the limitation period?
Simply put the start of the limitation period is when the creditor legally has the right to take action against the debtor to recover the debt.
The limitation period, more often than not begins at the time the debt is due or when the terms of the agreement have not been met by the debtor.
The actual date this may start will vary depending a number of factors such as the terms of the contract, which jurisdiction and the classification of the debt.
Furthermore, there are some circumstances by which the debt can be reset, in the instance the debtor makes a payment or acknowledges the debt in writing the statute of limitations is then reset, at this time you will have the full limitation period to seek legal action if required.
It is essential to consult with a professional debt recovery specialist if you believe as a creditor you have a statute barred debt, as the limitation period can reset multiple times depending on the jurisdiction and with some states or territories the statute of limitations can being again after the initial expired period. and as a creditor if you believe you have a statute barred debt
Is a statute-barred debt collectable?
While the debt still exists in all states and territories, except in New South Wales where the debt is cancelled at the expiry of the statute of limitations, it is unenforceable.
You may still try to recover the debt but you would need to exercise caution and only ask for payment, you are not able to threaten any form of legal action or mislead the debtor by making them believe they are under any obligation to pay.
A written letter from the debtor denying any liability of a statute-barred debt requires all efforts to collect the debt cease, it should also be noted you may be required to advise the debtor of the debt’s legal status as a statute-barred debt.
Recovery of a statute-barred debt is doubtful, but there may still be other avenues to recover a statute-barred debt, however in most cases with no legal way available to you, you are essentially relying on the debtor’s sense of personal obligation to repay the debt.
From a legal perspective seeking to recover a statute-barred debt is a perilous situation, should you violate the law in process of attempting to collect on the debt, you might find it is you who is facing legal action.
For more information on statute of limitations on debt collection in your state check out 2005 ASIC report.
How long before a debt becomes uncollectible in Australia?
In Australia, a debt becomes uncollectible after the statute of limitations has expired. The statute of limitations is the time limit within which a creditor can take legal action to recover a debt.
The statute of limitations for unsecured debts (such as credit card debt, personal loans, and payday loans) is 6 years in all states and territories except the Northern Territory, where it is 3 years.
Once the statute of limitations has expired, the debt is considered statute barred. This means that the creditor cannot take legal action to recover the debt, and the debtor does not have to pay it.
However, there are some exceptions to this rule. For example, a creditor may still be able to recover a statute barred debt if:
- The debtor has acknowledged the debt in writing within the 6-year period.
- The debtor has made a payment toward the debt.
- The creditor has a court judgment against the debtor.
- The debt is secured by collateral, such as a mortgage.
If you are unsure whether a debt is statute barred, you should speak to a financial counsellor or lawyer.
It is important to note that even if a debt is statute barred, it may still appear on your credit report. However, you can dispute the debt with the credit reporting agencies and have it removed.
If you are being contacted about a debt that you think may be statute barred, you should not make any payments or acknowledge the debt in writing. You should also speak to a financial counsellor or lawyer to get advice on your rights.
How long until a bad debt is written off?
There is no set timeframe for when a bad debt is written off. It depends on a number of factors, including:
- The company's internal policies and procedures
- The type of debt
- The debtor's financial situation
- The likelihood of collecting the debt
Some companies may write off bad debts after a certain number of days, such as 90 or 120 days. Other companies may wait longer, depending on the factors listed above.
In Australia, the statute of limitations for unsecured debts is 6 years. This means that a creditor has 6 years from the date the debt was incurred to take legal action to recover it. If the creditor does not take legal action within this timeframe, the debt is considered statute barred and the debtor does not have to pay it.
However, even if a debt is statute barred, a creditor may still be able to write it off on their books. This is because the statute of limitations only applies to the creditor's ability to take legal action, not their ability to write off the debt.
Ultimately, the decision of when to write off a bad debt is up to the individual company.
Here are some general guidelines for when a company may write off a bad debt:
- The debt has been unpaid for more than 120 days.
- The debtor has filed for bankruptcy or insolvency.
- The debtor has disappeared or cannot be contacted.
- The debtor has refused to make any payments or negotiate a payment plan.
- The company has determined that the debt is unlikely to be collected.
If you are a creditor and you are considering writing off a bad debt, you should speak to a debt collector to see if they can bring in your aged receivables.
When is a debt written off in New South Wales
An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims:
(a) a cause of action founded on contract (including quasi contract)
When is a debt written off in South Australia
The following actions namely … actions founded upon any simple contract express or implied, or upon any award where the submission is not by specialty … shall, save as otherwise provided in this Act, be commenced within six years next after the cause of action accrued and not after.
When is a debt written off in Tasmania
Except as otherwise provided in this Division, the following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is to say:
(a) actions founded on simple contract (including contract implied by law)
When is a debt written off in Victoria
The following actions shall not be brought after the expiration of six years from the date on which the cause of action accrued—
(a) Subject to subsections (1AAA), (1AA) and (1A), actions founded on simple contract (including contract implied in law)
When is a debt written off in Western Australia
An action on any cause of action cannot be commenced if 6 years have elapsed since the cause of action accrued.
When is a debt written off in Australian Capital Territory
Subject to subsection (2), an action on any cause of action is not maintainable if brought after the end of a limitation period of 6 years running from the date when the cause of action first accrues to the plaintiff or to a person through whom he or she claims.
When is a debt written off in Northern Territory
Subject to subsection (2), the following actions are not maintainable after the expiration of a limitation period of 3 years from the date on which the cause of action first accrues to the plaintiff or to a person through whom he claims:
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