There are many ways a creditor can seek to recover payment of a debt from an individual who cannot, or refuses to, pay that debt.

Individuals should be aware of their rights and obligations in the event that debt collection processes are in motion and they are exposed to legal action and enforcement.

So what types of notices should an individual seek advice in relation to and what can happen if a person cannot pay their debts when they fall due? What are the consequences if the matter ends up in court?
A range of debt recovery tools exist to assist creditors in recovering overdue debts. Debtors also have certain options to allow them to dig their way out of trouble if a creditor comes knocking at their door.
Letter of DemandUsually the first step in a creditor’s arsenal of debt collection weapons, a letter of demand sets out the debt which the individual owes to the creditor and a demand for payment, usually within a tight time frame after which time the creditor can threaten to (and actually) take the matter to court if the debt is not paid.
A creditor can also rely on letter of demand in court proceedings to prove their attempt to settle the matter before filing a claim. A debtor may respond to a letter of demand by paying the amount in full, seeking a repayment arrangement or negotiating a part payment in return for the creditor refraining from legal action.
Statement of ClaimIf a letter of demand and any subsequent negotiations are unsuccessful in securing payment of a debt, the next step for the creditor to take is court action against the individual by filing an originating process or a ‘Statement of Claim’ which then needs to be served on the Defendant personally within 6 months of the date of filing the claim.
The Statement of Claim pleads the case against the Defendant, seeking payment of the lump sum debt (sometimes referred to as a ‘liquidated’ claim). Once a Statement of Claim has been filed, the Defendant has 28 days to file a defence. If no defence is filed, the Plaintiff (who filed the claim) can ask the Court to enter default judgment against the Defendant and in favour of the Plaintiff.
The debt amount dictates the court jurisdiction. In NSW, the various options are as follows:

  • Debts under $10,000: Small Claims Division of the Local Court
  • Debts between $10,000 and $100,000: General Division of the Local Court
  • Debts over $10,000 and up to $750,000: District Court
  • Debts exceeding $750,000.00: Supreme Court.

Enforcing a Judgment DebtOnce the creditor obtains a judgment debt against an individual (referred to as a ‘judgment debtor’), they can enforce it in a number of ways:

  • Writ of possession for land (Supreme or District Courts)
  • Writ of delivery for goods
  • Examination summons whereby the debtor answers Court’s questions about how he or she can satisfy the judgment
  • Writ for the levy of property whereby the Sheriff can attend debtor’s premises and seize and sell them with the proceeds going to the judgment creditor
  • Garnishee order in order to access the debtor’s bank account or wages
  • Charging order which can apply to property such as stocks and shares in a public company, money on deposit in a financial institution or any equitable interest in property (Supreme or District Courts)

In NSW, a judgment debt is generally enforceable for a period of 12 years (or such further period as granted by a Court). If standard debt recovery procedures do not succeed, the creditor may be able to commence bankruptcy proceedings against an individual.
Bankruptcy ProceedingsIf a creditor successfully obtains a court judgment and the debtor fails to pay the judgment debt, they may choose to serve a bankruptcy notice on the debtor.

Bankruptcy notice

A bankruptcy notice is a formal notice of demand issued by the Official Receiver requiring a debtor to pay a debt within 21 days of service of the notice. A bankruptcy notice must be based on a final judgment or order (or more than one judgment or order) issued no more than 6 years earlier for at least the total sum of $5,000.
In order to succeed on a bankruptcy notice, a creditor must prove the debtor has committed an “act of bankruptcy” no more than 6 months before the date of the creditor’s petition. The acts of bankruptcy are set out in section 40 of the Bankruptcy Act 1966 (Cth), the most common being failure to comply with a bankruptcy notice.
To apply for a bankruptcy notice, a creditor may complete an online application or lodge the approved hard copy form. Fees and charges are set out on AFSA’s website.
Upon being served with a notice, the debtor has 21 days to respond by either repaying the debt or offering a payment proposal to the creditor. 
If the debtor does not respond to the bankruptcy notice within 21 days (or apply to set the notice aside within the time limit), the creditor may file a Creditor’s Petition to have the debtor declared bankrupt.
If the debtor can persuade the Court to adjourn the matter and allow the debtor to pay debts within a reasonable time frame, the debtor may avoid being declared bankrupt.

Forced bankruptcy: creditor’s petition

A creditor, or a group of creditors, may apply to the court to have an individual who owes them more than $5,000 declared bankrupt.
The procedure is as follows:

  • Obtain a judgment for the debt owed to the creditor;
  • File a creditor’s petition to the Federal Court or Federal Circuit Court of Australia to have an individual declared bankrupt.

The creditor is responsible for the costs in filing a creditor’s petition. Prior to lodging an application, the creditor should conduct a search of the National Personal Insolvency Index (NPII) to see if the debtor is already bankrupt or party to a debt agreement or personal insolvency agreement. The creditor must serve the notice within 6 months of the notice being issued and the debtor may then apply to the Court to have it set aside.
The Federal Court of Australia or the Federal Circuit Court of Australia registries and website provide comprehensive details of the process, forms and fees for a creditor’s petition. Read their Creditor’s Checklist.

Sequestration order

A sequestration order is a Court order declaring someone bankrupt.
When the order is made, the bankrupt’s divisible property comes under the control of a private trustee (if nominated by the creditor and the trustee has consented to act) or the Official Trustee (if no private trustee has been nominated and consented to act). The trustee will then be appointed to manage the debtor’s financial affairs and the judgment creditor has no entitlement to pursue the debt against the judgment debtor. The successful applicant/creditor will be able to provide a summary schedule setting outs its claim for legal costs and disbursements which may cover reasonable expenses for searches, the bankruptcy notice fee, filing fees and service of documents.

For more information on corporate insolvency review the resources below or contact us today.



From sudden employment and over-reliance on credit to relationship breakdowns and ill health, there are many reasons why people suffer financial hardship and experience unmanageable debt. If an individual cannot pay their debts they may and haven’t been able to reach an agreement with creditors, they may declare themselves bankrupt. Bankruptcy can either be voluntary or involuntary.


Declaring bankruptcy voluntarily in Australia is a straight forward process and involves completing two separate forms and lodging them with the Australian Financial and Security Authority. This article outlines declaring bankruptcy in four step.


Annulment is effectively the cancellation of a bankruptcy. This article outlines the three ways a bankruptcy may be annulled.


Many people do not know what will happen to their income, debts and assets once they become bankrupt. To assist in advising those on the brink of personal insolvency, here is a broad overview of the bankrupt’s entitlement to hold on to certain assets and income during the period of bankruptcy.


While bankruptcy doesn’t directly affect your employment, it may have consequences if you hold various licences or qualifications including building, property management, liquor and financial brokerage licences.


If an individual is made bankrupt, it is not necessarily the case that their house will be sold from under them. Given that in most bankruptcy cases we are dealing with the family home, it pays to have knowledge in this field to provide the best outcome for your client and hopefully “save the house”.


Family assets are commonly protected by the use of a structure named a discretionary trust (sometimes referred to as a ‘family trust’). This type of trust provides a firewall of protection for family trust assets.


The discharge of bankruptcy means that the individual is no longer bankrupt.
The date of discharge of bankruptcy will vary depending on the type of bankruptcy.



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