Personal insolvency & legal advice

It’s important that individuals facing personal insolvency are aware of their rights and obligations in the event of being faced with debt collection processes and exposed to legal action and enforcement.

Here we take a look at what types of notices an individual should seek advice in relation to and what can happen if a person can’t pay their debts when they fall due. We also consider the consequences if the matter ends up in court.

A range of debt recovery tools exists 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 demand

Usually the first step in a creditor’s arsenal of debt collection weapons, a ‘letter of demand’ sets out the debt the individual owes to the creditor and demands payment. This is usually within a tight timeframe, after which the creditor can threaten to (and actually) take the matter to court if the debt isn’t paid.

A creditor can also rely on a ‘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 claim

If 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’. This needs to be served to the defendant personally within 6 months of the date of filing the claim.

A ‘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 a 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 debt

Once the creditor obtains a ‘judgment debt’ against an individual (referred to as a ‘judgment debtor’), they can enforce it several ways:

• Writ of possession for land (Supreme or District Courts)
• Writ of delivery for goods
• Examination summons where the debtor answers the Court’s questions about how he or she can satisfy the judgment
• Writ for the levy of property where the Sheriff can attend the debtor’s premises and seize and sell them with the proceeds going to the judgment creditor
• Garnishee 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 a further period as granted by a Court). If standard debt recovery procedures don’t succeed, the creditor may be able to commence bankruptcy proceedings against an individual.

Bankruptcy proceedings

If 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.

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 s 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 doesn’t 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. Before 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 – see the 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. This may cover reasonable expenses for searches, the bankruptcy notice fee, filing fees and service of documents.