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.

Read on to understand some considerations for recovery timelines, statute of limitations for debts and what or how these may impact your business. 

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.

FREE DEBT ASSESSMENT

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 favor to recover the debt, this judgement may influence the statute of limitations through most of Australia to a 12 year statute of limitations. For debts in Victoria and South Australia if there is a court judgement the statute of limitations is then 15 years.

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.

FREE DEBT ASSESSMENT