Important things to know about debt

A person cannot be sent to prison for not paying a debt to a private company or individual.

Not paying a debt is a civil matter, not a criminal offence. Civil debts (like loans, credit cards, utility bills, or rent arrears) are disputes between private companies and individuals. Generally, prison is reserved for criminal offences, not for failing to pay a private debt.

Some exceptions do exit but they are uncommon. In limited circumstances, a community member might face prison for debts to the state (for example, a SPER debt) or if they have a crime connected to the debt (like fraud or contempt of court).

For most of the community members that you support, not paying a private debt will not put them at risk of going to prison.

Some creditors will list a default on a person’s credit history.

There are strict rules about when a default can be listed, how long it remains on a credit history, and when the information needs to be updated.

The Financial Rights Legal Centre has some useful information on credit reporting: Credit Reports – Financial Rights Legal Centre

A creditor may start legal proceedings to try to recover the amount they say is owed.

In practice, legal proceedings are expensive and time consuming. For relatively small debts, many creditors will not start legal proceedings if they are aware that they person in debt has no assets or income.

If you’re supporting a community member and the creditor has said they will start legal proceedings, we suggest contacting a community legal centre to request advice.

In some situations, a government-approved debt agreement may be appropriate and provide an alternative to bankruptcy.

For some community members, particularly those on low incomes, these arrangements can lead to worse outcomes.

Always refer the community member to speak to a financial advisor to obtain expert advice about this.

A debt collection company, also called collection agencies or debt collectors, are companies that specialise in collecting debts.

Different debt collection companies operate in different ways. Some companies buy old debts, often for a fraction of its original value. Even though the agency pays much less for the debt, they can still pursue the full original balance from the community member. If they have paid less for a debt however, the agency may be open to a reduced settlement.

Other debt collection companies are engaged by companies to collect debts on the original company’s behalf. The debt collection company is then acting for the original company.

A community member can apply for bankruptcy themselves, or be forced into bankruptcy by a creditor if the debt is over $10,000.

It usually lasts 3 years and 1 day but can be extended. Bankruptcy can affect property, credit history, and future financial options, with long-term impacts.

Always refer the community member to speak to a financial advisor or community legal centre to obtain expert advice about this.

Judgment proof is a general term used to describe the protections that exist for people on low incomes that do not own assets (like a house).

A person is judgment proof if, even if a creditor wins in court, they cannot collect the debt. This happens if the person has no assets or employment income that can legally be taken. For example, Centrelink payments and basic household goods are protected.

While a creditor may obtain judgment, they won’t be able to enforce the debt while the community member is judgment proof. In practice, creditors rarely start court action if they know a person is judgment proof because of the cost involved.

For community members that are judgment proof, it may be in the interest of the creditor to waive a debt, rather than spend more money trying to enforce a debt they won’t be able to recover.

We have more information on our judgment proof page.

A debt is ‘statute barred’ when the legal time limit to recover it has expired. This usually happens if, in the last 6 years no payments have been made, the debt has not been acknowledged in writing, and the creditor has not started court action.

Creditors cannot enforce statute-barred debts. However, some creditors may contact a community member to ask for payment of an old debt, which would re-start the time they have to enforce the debt.

This does not apply to all debts (i.e. government debts).

Many companies have internal policies that can help people experiencing financial hardship. Consumers also have legal rights to hardship assistance in some situations.

For example, the consumer credit laws require credit providers to offer hardship assistance. This can occur multiple times. Hardship assistance can include a hold on payments, payment plans, other hardship variation, or full debt waiver.

If a community member is in hardship, contact the company’s hardship team to discuss the available options. If the company is not helpful, a financial counsellor or community legal centre may be able to give advice about the protections available.

A minor defect in loan paperwork will rarely reduce or cancel responsibility to repay.

Similarly, where a bank or credit provider has behaved badly, this usually does not cancel somebody’s obligation to repay money borrowed or services received. However, this behaviour may reduce the amount a credit provider can charge in fees or interest.

Australia has laws that impose obligations on credit providers to consider whether the credit product is ‘not unsuitable’. These are called the responsible lending laws.

A credit product would be unsuitable if the borrower cannot afford it, or it does not meet their needs. If the credit provider breaches these obligations when providing a loan, the borrower has the right to be put back into the position they were in before they got the loan.

Generally, this means that the borrow is not required to pay interest or fees, although they may need to pay the original loan amount. Borrowers may also be intitled to other compensation.

We have more information on our page on responsible lending.