The process of debt collection is often a stressful one for both parties. It can really put a strain on both the creditor and the debtor, as well as the personal relationship between them. Business owners and other creditors have therefore found good use in the services offered by debt collection agencies if only to avoid the hassle of chasing down a debtor. However, it is worth noting that a debtor’s debt can be wiped clean, preventing the creditor from getting back what is due. This is because debts are legally subject to the statute of limitation and thus after a certain period of time, the debtor ceases to be legally obligated to pay off the debt.
In Australia, the statute of limitation varies based on the type of debt, as well as the jurisdiction. For most of Australia, the limitations period of a simple contract is six years. However, the Northern Territory has set their limit to 3 years. This means that any legal action to be taken against a debtor in a bid to recover the debt should be taken before the stipulated period elapses. The six-year limitation commences either:
- When the debtor admits in writing to having a debt
- On the date when the last payment was made
If the period passes without the creditor pressing legal charges against the debtor, then the court will perceive the debt as statute barred, preventing the debtor from further pursuing the debtor through court action.
If the creditor takes legal action against the debtor within the first limitation period, and the court rules in the creditor’s favour, a new limitation period commences. This period is 12 years in most of Australia. However, Victoria and South Australia are exceptions to this, as their limitation period for debts associated with court judgement is 15 years. The 15-year limitation period applies to:
- New actions taken after the court has ruled in the creditors’ favour
- Debt related to a mortgage on a property, whose limitation period is always 15 years.
However, this talk on limitation periods raises the question, “Can one recover a statute barred debt?”
Legally, it is only in New South Wales where debt is wholly cancelled after the limitation period elapses. All other Australian jurisdictions allow for the creditor to continue pursuing the debtor for his or her dues. However, the creditor cannot make use of the courts in this pursuit and whether or not the debt is paid off depends solely on the debtor’s sense of personal obligation. If the debtor feels you are forcing his hand, they could easily begin a court action against you and the hunter will become the hunted.
Understanding the implications of the statute of limitations is important for business owners as bad debt not only interferes with your business’s cash flow but also may have far-reaching implications such as running down your business.