If you have fallen behind in the payment of a debt chances are the creditor or a debt collector will contact you. This contact may be by phone or letter. A letter sent by a creditor or its debt collector will often threaten you with legal action unless the debt is paid. Many debts are collected and even sold on the basis of computer records, however, and as such systems are not infallible, mistakes are sometimes made.

What should you do if a creditor or debt collector demands payment of a debt?

Before you pay the amount demanded by the creditor or debt collector you should check to make sure that you actually owe the money. Get as much information as you can from the debt collector and check your records before you agree to pay anything. If you are in doubt about whether you are liable for a debt, get legal advice.

Unless you are sure that the amount claimed is correct and the debt is legally owed, you should write to the debt collector as follows:

I refer to your letter dated [date of letter of demand] or phone call of [date]..

So that I may seek advice on your claim, please provide the following:

• Copy of the contract relating to the alleged debt
• Copies of account statements from [date] to [date]
• Details of how the amount claimed was calculated.

It is up to the debt collector to produce some proof that the debt is owed. If the debt is the result of a loan you took out for personal (rather than business) purposes, you may be entitled to more information. See Fact Sheet: How Do I Get Copies of My Loan Documents?

Possible defences that may relieve you of your obligation to pay the debt

There are many reasons why you may not be liable for all or part of a debt claimed. These are known as defences. Examples include:

• You did not receive the goods or services for which payment is claimed
• The amount claimed has been calculated incorrectly
• You have already paid the debt
• You are not the debtor (a case of mistaken identity)
  
• The debt is statute barred - this is when the creditor has failed to bring an action to recover the debt within the time stipulated by law
• The circumstances surrounding the formation of the contract were unjust
• You were mislead about what you were signing, or the goods or services you were paying for
• The contract which led to the debt was unjust

If you believe that you have a reason (recognised by the law) why you should not have to pay the debt you should seek legal advice immediately. If you believe you may have a defence to a debt, DO NOT MAKE ANY PAYMENT OR ADMISSION BEFORE GETTING LEGAL ADVICE. You should also advise the creditor or debt collector in writing that you are seeking legal advice and request that it not commence legal proceedings against you until you have the opportunity of obtaining that advice.

What if you agree you owe some of the debt?

If you agree that you owe a portion of the amount claimed you should write to the creditor setting out how much you believe you owe, and your reasons for disputing the rest of the claim. You should make a “without prejudice” offer to settle the debt in full for the amount you believe you owe, even if you need to pay this amount by instalments. If the debt collector accepts your offer it is critical that you get their acceptance of your offer in writing. Any acceptance offer should state that the amount is in “full and final settlement of all monies owed”.

If the debt collector will not agree to accept the lesser amount, get legal advice. It will usually be advisable to pay the amount you agree you owe even if the debt collector refuses to agree to a settlement, but you should always seek legal advice first.

What can you do if you owe the money being claimed, and there are no grounds on which may be able to avoid payment of the debt?

You need to consider how to respond to the creditors or debt collectors' demand for payment. Your options are:

• repay the debt in full in one lump sum payment;
• negotiate with the debt collector/creditor; or
• do nothing.

If the debt you are being pursued for is the result of a loan, see also Fact Sheet: Can't Pay Your Loan available at www.cclcnsw.org.au/factsheets.

1. Repay the debt in full
If you have sufficient money to repay the debt in full it is best to do so as this will ensure that the debt doesn't increase any further with added interest and enforcement costs. Payment of the debt in full will usually also stop debt collectors contacting or harassing you, although in some cases this does not occur.

However, if you have other debts you will need to take into consideration the impact of a lump sum payment on your ability to repay those other debts.

2. Negotiate with the debt collector/creditor
If you are unable to repay the debt in full you may wish to negotiate with the creditor about payments. Your main options are:

1. Offer to pay the debt in instalments; or
2. Offer a reduced lump sum to finalise the debt; or
3. Ask the creditor to write-off the debt; or
4. Ask for a payment moratorium for a specific length of time.

a. Offer to pay the debt in instalments

You could contact the creditor and offer to pay the debt in instalments. Make sure when offering repayment arrangements you:

• can afford the repayment amount you are offering
• only offer to pay monthly. This means that you have a whole month to save the money required for the repayment
• if the creditor agrees, ask them to confirm the agreement in writing
• confirm any verbal agreement by writing to the creditor yourself (make sure you keep a copy of this letter).

The creditor does not have to accept the repayment arrangement offered. If this happens in your case seek legal advice or see a financial counsellor for assistance (see Getting Help for details). If the debt is in relation to a loan, you may also be able to make a variation on the grounds of hardship in certain circumstances. See Fact Sheet: Hardship Variations on Consumer Loans.

b. Offer a reduced lump sum to finalise the debt
Depending on the size of the debt, the age of the debt and the gap between your offer and the actual debt, the debt collector may accept your offer. If you wish to make a reduced lump sum offer it should be on a “without prejudice” basis.

If the debt collector accepts your lump sum offer it is critical that you get their acceptance of your offer in writing. Any acceptance offer should state that the amount is in “full and final settlement of all monies owed”.

c. Ask the creditor to write-off the debt
In some circumstances a creditor/debt collector may be willing to write your debt off. However, before even considering such an offer a creditor/debt collector would usually have to be satisfied that you had no prospects, now or in the future of being able to repay the debt.

If you can establish that this is the case the creditor/debt collector may be willing to write your debt off in order to claim a tax deduction for a bad debt. If it appears that there is nothing to be gained from commencing proceedings against you, or bankrupting you a creditor may consider writing your debt off.

If a creditor/debt collector does agree to write your debt off it is essential that you get this in writing. Otherwise you may find yourself being pursued for the debt later on. If you wish to do this you should see a financial counsellor for assistance (see Getting Help)

d. Ask for a payment moratorium
Where your inability to pay the debt is only temporary it may be possible to obtain agreement from the creditor to stop making repayments for several months. If you seek a payment moratorium you should seek to have any interest on the loan frozen until repayments recommence. You may also be able to make a variation on the grounds of hardship in certain circumstances which includes a payments moratorium. See Fact Sheet: Hardship Variations on Consumer Loans.

3. Do nothing
Your final option is to do nothing. If there is no way that you can afford to repay the debt and you have no property that could be sold to repay the debt, or your income is too low to be garnisheed you may opt to do nothing. However, you need to keep in mind that the creditor/debt collector has six years to commence proceedings against you in relation to a debt in relation to a contract (12 years if the debt is based on a deed), and 12 years to enforce any court judgment obtained against you (in some circumstances even the 12 years to enforce judgement may be extended). You may have income or property at some time in this period. If this is the case, you will have to pay the debt PLUS interest, which after many years may be a large sum of money.

Bankruptcy

If you are stressed by constant contact by creditors, or your furniture or motor vehicle are under threat of being sold to pay your debts, you may wish to consider bankruptcy. See Fact Sheet: Bankruptcy .

Your credit report

Often a debt collector will threaten to list a default on your credit report if you do not pay in accordance with a demand. This is a common tactic for encouraging payment. It is also legal so long as the debt is more than 60 days overdue. Unfortunately, you may be listed even if you dispute the debt. As you will not usually be notified that a default listing has occurred, you should check your credit report. For more information on checking you credit report and disputing errors on your credit report, see Fact Sheet: Your Credit Report .

What if the debt collector or creditor is harassing you?

See Fact Sheet: Debtor Harassment.