Fact Sheets | Dealing With Debt
Challenging a debt - overview
Before paying any debt, it is worth askiing a few questions. In some circumstances, you can challenge whether the debt is actually owed.
Is the debt too old?
Is the amount correct? (Perhaps it should be less.)
Is the debt in the right name?
Was the lending "responsible" as defined by consumer protection laws?
Is the debt too old?
There is a time limit for the recovery of debts. If you receive a demand for payment of an old debt, you should check to see if it may be “statute barred”, which means that the creditor has waited too long to recover the debt and won’t be allowed to do so now.
A debt might be statute barred if:
You haven’t made a payment for at least 6 years, and
In the last 6 years, you haven’t admitted in writing that you owe the debt, and
No court judgment has been entered against you.
The creditor has longer to recover debts if:
It arises from a deed rather than an ordinary contract (a mortgage is usually a deed); or
There is a judgment against you.
If you think it might be more than six years since you last made a payment on the debt, or acknowledged the debt in writing and you are not aware that any court judgment has been made against you:
Don’t make a repayment;
Don’t agree that you owe the debt;
Do get advice immediately from a financial counsellor or lawyer; and
Do ask the debt collector or lender to provide copies of the loan contract and the account statements, and any judgment if they say that there is a judgment against you. (See the fact sheet on this page "Debt - getting information.)
If you are being sued for an old debt
The fact that a debt is statute barred gives you a defence if you are being sued in court, but it is up to you to raise the defence. This means you will have to file documents in court. You should get legal advice about this.
Is the amount of the debt correct?
If you accept that you owe the debt but disagree with (or are unsure about) the amount claimed, you can ask for information about the debt. In particular you should ask for a statement of your account that sets out:
The amount and date of the alleged debt
How it is calculated
Details of all payments made and all amounts owing (including principal, interest, fees and charges)
Read the statement carefully. It might include recovery fees or expenses charged by the creditor or debt collector. Check your original contract to see whether you have to pay these fees. Talk to a financial counsellor or get legal advice if you think the fees or charges are unfair.
A debt collector should stop collection activity until your request for information has been met, and the debt has been confirmed. A default listing on your credit report should not be made during this period.
If you are contacted about a debt that you have already paid in full, explain the situation in writing and include copies of any records or information you have that prove the debt has been settled.
For more information about your rights when dealing with debt collectors see the fact sheet on this page.
Is the debt in the right name?
When you receive a demand for payment of a debt, you need to make sure the debt is yours, before you agree to make any payments.
Debt and relationships
You are not automatically responsible for another person’s debts, just because of a relationship with that person.
Parents are not responsible for children’s debts and vice versa
You are not responsible for your partner’s debts just because of your relationship, whether you are married or not.
However, you may have become liable for a debt because you signed a loan contract as a joint borrower or guarantor, or because you were a director of a family company or a partner in a business.
When you have a joint debt, each of you is responsible for the whole debt. This means that if the other person doesn’t make payments, the creditor can look to you for payment of the whole debt. As far as the creditor is concerned, it doesn’t matter what arrangement you had with the other person about how much each of you would pay. If payments are behind, the creditor can demand payment from you for the whole of the debt plus any fees, interest or charges because of non-payment.
This still applies even if your relationship with the other person has ended. In most cases you will not be able to get out of loan contracts you have made in the past, but you should get legal advice about this.
If you have been a guarantor for some one else’s loan, and they have defaulted on payment, the creditor will seek payment from you. If the guarantee is secured over your house, the creditor can repossess your house. There are some very limited circumstances in which a guarantee can be challenged. You should get legal advice if:
You agreed to be a co-borrower or guarantor under pressure or through fear
You did not understand the nature or extent of the commitment you were making.
Just because a debt collector tells you that you should pay a debt doesn’t mean that you owe the money. Many debt collection agencies buy computer-based information about debts. Sometimes the original creditor will have incomplete information on its computer and will mistakenly sell a debt that has previously been paid or settled. Sometimes debt collectors even demand money from the wrong person. Carefully check your records (contracts, statements, receipts etc) before you agree to pay any money.
In cases of mistaken identity, showing your driver’s licence or other ID may resolve the situation. However, the decision to show ID is yours – you cannot be forced to do so by a debt collector. If you think someone is using your personal details to run up a debt in your name, contact your credit provider immediately. See the MoneySmart website for more information.
Was the lending responsible, as defined by consumer protection laws?
Consumer protection laws impose “responsible lending” obligations on lenders and finance brokers. This means that they are required to
Make reasonable inquiries about your financial situation and your requirements and objectives;
Take reasonable steps to verify your financial situation; and
Make an assessment that the credit contract is ‘not unsuitable’ for you.
A credit contract is unsuitable for you if:
You are not able to meet the repayments, or can only meet the repayments with substantial hardship, or
It does not meet your requirements and objectives
You can obtain a copy of the lender’s assessment about the suitability of the credit. If you think you may have received credit that is unsuitable to you, you should get legal advice.
Other common defences to debts are:
The debt is old and statute barred – that is, the debt is outside the time provided by the law to sue for the debt (see above).
You were misled or deceived about what you were signing or getting when you first entered the contract
The circumstances surrounding the debt are unjust or unconscionable.
You are entitled to a hardship variation or arrangement under one of the various hardship schemes.
The contract you signed contained unfair contract terms that affect the amount you have to pay. For example, a mobile phone contract might contain an unfair cancellation penalty.
There are many laws protecting consumers. Seek legal advice so that you understand all your rights.