Dealing with debt collectors: the simple how-to guide

More and more Australians are finding themselves fighting a daily battle with debt. If you owe money, you can be sure the creditor will come knocking on your door before too long.

What to do if a creditor or debt collector demands repayment

Before paying the amount demanded you should:

  • Make sure you do in fact owe the amount demanded.
  • Check your records that the amount is actually correct
  • Check whether it’s been over 6 years since you made a repayment towards that debt
  • Find out whether the debt collector is a member of an External Dispute Resolution Scheme (EDR)

What is the first step after receiving a letter of demand to pay a debt?

The options for responding to a debt collection letter include the following:

  • Repay the debt in full in one lumps sum
  • Negotiate with the creditor or debt collector for an informal arrangement to repay a reduced amount gradually on the grounds of financial hardship
  • Negotiate to settle the debt for a reduced lump sum
  • Do nothing and wait to see what the creditor does

1. Repay the Debt in full

If you have sufficient funds to repay the debt in full its best to do so as it will prevent the debt increasing further.

You will need to consider the impact paying a lump sum repayment will have on your ability to meet your everyday bills and expenses.

2. Negotiate an Informal Payment arrangement

If you organise an informal arrangement to pay off a debt make sure you:

  • Can actually afford the repayment amount you’ve offered
  • Tell the creditor of your financial hardship
  • Offer to may monthly, giving yourself a whole month to collect the money
  • Have the agreement confirmed in writing if the creditor agrees
  • Confirm any verbal agreements in writing by writing tot he creditor and keeping a copy yourself

How do you make a repayment arrangement?

  • Start making repayments, but only as much as you can afford
  • Contact the creditor or debt collector and seek an informal arrangement to repay what you owe
  • If the creditor agrees to the arrangement, confirm it in writing

3. Offer a reduced lump sum

Depending on the size of the debt, the creditor may accept an offer less than the original debt in order to secure some level of repayment.

If the creditor accepts your lump sum offer, it’s critical you get the acceptance in writing and it should state that the amount is in “full and final settlement of all monies owed.”

4. Do nothing and wait

If there is absolutely no way you can afford to repay the debt and you don’t own any property you can sell, then you may decide to do nothing. BUT you need to remember that the creditor has 6 years to commence proceedings against you to recover the debt, 12 years if there’s a court order obtained against you, and that’s an awfully long time to have it hanging over your head. The longer you leave it, the more interest will accrue and the higher the total amount owed will be.

I don’t owe the debt the debt collector is claiming OR I only owe part of the debt claimed.

There are situations where the creditor may have made a mistake and you don’t actually owe what they claim. Examples of situations like that include:

  • You didn’t receive the goods the creditor is claiming payment for
  • The amount has been calculated incorrectly
  • You have already paid the debt
  • Your identity has been mistaken
  • The debt is barred by statute: this happens when the creditor has failed to bring an action within the time stipulated by law (usually 6 years).
  • The contract was misleading or deceptive
  • You were misled about what you were actually buying

If you believe you have a reason not to pay the debt being claimed against you, you should:

  • Contact the creditor or debt collector and tell them you don’t believe you owe all or part of the debt and you want it investigated.
  • Request copies of the relevant documents

If you know you do owe part of the debt, start making repayments to reduce the amount but continue with the proceedings disputing the remaining amount

If you are threatened with legal action or the creditor refuses to investigate your claim you should lodge a dispute with the EDR or if court proceedings do eventuate, seek legal advice to file a defence.

Your Personal Credit Report

Many creditors threaten to list a default in repayment on your credit report in order to encourage repayment. This is a legal tactic as long as the debt is more than 60 days overdue. Unfortunately, you may be listed even if you dispute the debt because you will usually not be notified of a default listing. If you think there’s a chance you may be listed, check your credit report.

Dealing with debt is a daily battle for many Australians. Don't be overwhelmed. You can use the strategies above to climb out without bending yourself over a barrel. Remember, your creditors are people too. Don't be afraid to ask if you can come to some alternative arrangement. The worst they can say is no.



 


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Phil Khor

Phil Khor , Founder at SavvySME

Great article Kate, seriously practical tips. I think dealing with debtors is just as tricky for us small business, esp when dealing with larger clients. Do you have a post you can put up about this?

Kate Horman

Kate Horman , Owner at T

Thanks Phil. Absolutely I do.