Can you go to jail for debt?

If you get sued for unpaid debt, what could happen to you? We break down the process of debt settlement in Australia

Can you go to jail for debt?

Getting stuck in debt, whether it’s credit card debts or student loans, is frightening. Especially when times are hard the way they have been in recent years, many borrowers find themselves in situations where they failed to pay their debts in time and the threat of being sued because of debt looms. However, can you actually go to jail for debt?

The answer is no – even if the debt is linked to a crime like tax avoidance or ducking a debtor’s examination, you can only be charged for the crime and not the debt itself. However, a creditor can sue you for unpaid debt, which in many cases results in the need to declare bankruptcy.

Thus, while “debtors’ prison” may not be a reality in Australia today and you won’t actually get jail time for a debt, there can still be legal repercussions for not paying your debts in a timely manner. In this article, we outline the process of debt collection in Australia, the instances in which you can be sued for debt, what debt collectors can and can’t do, and what could happen if you duck your debt collector.

How long can a debt be chased in Australia?

According to Rostron Carlyle Rojas Lawyers partner Paul Rojas, the standard limitation period for debts is six years as per the Limitation of Actions Act 1974 (QLD). That is, a debt collector or creditor can chase a debt from six years starting from the following dates:

  • the debt’s due and payable date
  • the last date on which the debtor made a payment in relation to the debt
  • the date on which the debtor made a written acknowledgment of their debt

The latter two conditions reset the six-year limitation period. This limitation period applies to the majority of Australian states, with the exception of the NT – in this state, the limitation period is three years. For creditors, it is crucial to set the limitation period correctly, as an inability to do so can mean that an unsettled becomes statute barred. This means that the debt becomes older than the limitation period, and the creditor has lost the legal right to recover the debt.

Under what conditions can you be sued for debt?

If the creditor has established their legal right to collect on your debt, then your inability to pay up means they can sue you to get what they’re owed.

It’s a wise idea to consult with a financial counsellor if you find yourself in debt. You need to put together a proposed debt or personal insolvency agreement that benefits your creditor – otherwise, they may choose the option of pushing you into declaring bankruptcy if they receive more financial gain from it.

Countering such a lawsuit can be seriously disadvantageous if the scales are tipped in the creditor’s favour, since you add legal expenses on top of what you already owe.  If your creditor gets a ruling in their favour, the court order that forces you to declare bankruptcy grants the creditor the following privileges:

  • they can seize the property you used as collateral even if more than $10,000 or 25% of the loan amount has been paid
  • they can repossess any property you own that is valued at over $7,300 (this figure changes year to year)
  • they can redirect part of your wages to themselves
  • they can freeze your bank account
  • they can sell your debt to someone else, which could complicate your situation if the new collection agency isn’t familiar with it

You could also be compelled to cover your creditor’s legal expenses.

Things that debt collectors can do

In order to recover a debt, a debt collector is allowed to contact you by phone or by email and social media, according to Money Smart. They can also seek a face-to-face audience.

Such interactions can involve the following:

  • a request for payment
  • an offer to settle or come up with a payment plan
  • an inquiry into why an agreed payment plan has not been acted upon
  • a review of the current payment plan following an agreed-upon period
  • advice on steps to follow if the debt is not paid
  • repossession of goods related to the debt if the right process has been conducted

Specific time frames have been set for creditors to get in touch with debtors. A creditor can only call you on 7:30am-9pm on weekdays and 9am-9pm on weekends. Calls may be made a maximum of 3 times a week or 10 times a month; however, they may not call on national public holidays.

When contacting you via email or social media, the creditor must be reasonably certain that the account isn’t shared and that messages delivered to that account are private.

What debt collectors are not allowed to do

Even though a debt collector is allowed to contact you to chase a debt, they still have to respect your personal boundaries. You can call the cops on a collector who’s making violent threats against you, and you can write a letter to address harassment or intimidation tactics they employ. If they refuse to cut down on inappropriate behaviour, you can get the Australian Financial Complaints Authority to intervene as well.

According to section 45 of the Australian Consumer Law and Fair Trading Act 2012, which outlines illegal debt collection practices, legally creditors cannot do the following to you or your family in pursuit of a debt payment:

  • trespass on your personal property
  • employ abusive language or intimidation
  • contact you beyond the set reasonable periods
  • employ deceptive tactics
  • capitalise on any illness, disability, age, illiteracy or inadequate grasp of the law on your part
  • talk about the debt to another party without your permission

What happens if you ignore debt collectors

A debt collector can initiate face-to-face contact as a last resort if attempts to contact you via phone or other means have been unsuccessful. They can seek an in-person meeting from 9am to 9pm.

While having to face a creditor is scary, it’s never a good idea to just ignore them because they are not going away until you settle your debt. Otherwise, you are only opening yourself up to a lawsuit. The wiser course is to avail of a financial counselling service, develop a payment plan you and the creditor can both work with, and do your best to pay up.

More often than not, debt collectors are just regular workers for a collection agency, so resenting them for hounding you is misplaced. Rather, aim to be polite to them so that you don’t make new enemies who could oppose you in court proceedings. Finally, be honest about why you can’t make a payment, and don’t wait until the last minute to say so.

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